What credit score means and how to boost yours
What's the story
Credit scores determine financial health. They are numerical representations of an individual's creditworthiness, determining loan approvals and interest rates.
Knowing what affects your credit scores can help you make informed financial decisions.
Here are key insights into cracking the code of credit scores, along with some practical suggestions to improve and maintain them effectively.
Influences
Factors influencing credit scores
Several factors go into calculating credit scores.
Payment history is a major factor, comprising 35% of the score. Timely payments benefit this factor, while late payments can decrease it.
Amount owed makes up 30%, with high balances hurting the scores.
The length of credit history constitutes 15%, with longer histories being beneficial in most cases.
New credit and types of credit used contribute 10% each.
Monitoring
Importance of monitoring credit reports
Regularly checking credit reports is essential to ensure good financial health. It helps to identify errors or discrepancies that might bring scores down.
You're entitled to one free report every year from each major bureau: Equifax, Experian, and TransUnion.
By reviewing these reports, you can dispute inaccuracies immediately and ensure that your score reflects your financial behavior accurately.
Improvement tips
Strategies for improving credit scores
To improve your credit score, you'll need to take some strategic actions over time.
Paying your bills on time is important since it directly impacts your payment history, a major factor in scoring models.
Paying down balances to reduce outstanding debt can also improve your scores considerably over time.
Avoiding new hard inquiries by limiting applications for new lines of credit helps you keep your score stable.
Utilization ratio
Impact of credit utilization ratio
The credit utilization ratio is extremely important, as it demonstrates how much revolving credit you're utilizing against your total limits.
Ideally, keeping this ratio below 30% is good, since lenders prefer low ratios when assessing risk.
This is because reporting agencies around the world have observed account activity patterns, which can work in your favor when it comes to credit ratings.