How credit scores influence major financial decisions
What's the story
Credit scores serve as the backbone of any financial decision.
They are numerical reflections of a person's creditworthiness, impacting everything from loan approvals and interest rates to rental agreements.
Knowing how credit scores work can give you the power to make smart financial decisions.
Here, we take a look at some important things you need to know about credit scores to navigate the money world better.
Key elements
Factors influencing credit scores
Several factors contribute to your credit score.
Payment history is one of the most important elements, accounting for 35% of your score.
Amount owed on accounts makes up 30%, while the length of your credit history contributes 15%.
New credit and types of credit used account for 10% each.
Knowing these components can help you focus on areas that need improvement.
Payment impact
Importance of timely payments
Timely payments are also critical to keeping your credit score healthy.
Late payments can drop your score by a huge margin and stay on your report for as long as seven years.
Having automatic payments set up or reminders can ensure you never miss a due date, saving your score from the unnecessary hit.
Utilization strategy
Managing credit utilization ratio
The credit utilization ratio is the percentage of available credit that you're using at any given time.
It is generally recommended to keep this ratio under 30% to maintain a good score.
Paying off existing debt and not maxing out cards can help you keep this ratio in check easily.
Monitoring practice
Regularly checking your credit report
Regularly reviewing your credit report helps spot errors or fraudulent activities that could adversely affect your score.
You are entitled to one free report each year from each of the three major bureaus: Equifax, Experian, and TransUnion.
Checking these reports ensures accuracy and gives you a chance to address any discrepancies on time.
Portfolio balance
Diversifying your credit portfolio
Having a mix of different credit types, such as installment loans and revolving accounts, can work wonders for your score. It shows that you are responsible with different types of accounts.
However, don't go opening new accounts unnecessarily, as it may result in hard inquiries, which may temporarily hurt your score.