How to Decode the 5 Main Factors that Determine your Credit Score

When it comes to getting an excellent interest rate on your mortgage, a car loan, a personal loan or a loan for your new business, your credit score is extremely important. The reason is simple; lenders can instantly tell how “credit-worthy” you are by looking at your credit score and, if it’s low, they know immediately that you have a problem handling your credit and most likely your finances too.  That’s not good.

Simply put, the higher your credit score is, the better rates you’ll get on new credit because lenders won’t be looking at you as a risk.  That being said, knowing how to figure out your credit score is extremely important, and it’s the focus of today’s blog. Enjoy.

Decoding your credit score is as simple as knowing the 5 main factors that lenders use. These include, in order of importance;

  1. Payment History
  2. Debt balance
  3. Length of credit history
  4. New credit applications
  5. Types of credit

Your payment history makes up 35% of your credit score. Simply put, that means you definitely want to pay all of your bills on time, every time. Making late payments even once or twice can put a serious ding in your score and drop it to levels that are unacceptable to lenders.

Debt balance. 30% of your credit score is made up by your debt balance, which is the ratio of the amount of credit that you’re using as opposed to the amount of credit that you have. Lenders like to see a debt balance of 30% or less. To figure out your debt balance, look at your total credit and compare that to your total credit debt. For example, If you have $10,000 in available credit and $2000 in credit debt, your debt balance is 20%.

Length of credit history. The amount of time that you’ve been using credit counts for 15% of your credit score, so getting credit as early as possible and, more importantly, keeping your credit history clean, can definitely help you in the long run.

New credit applications. Lenders can see each and every time you’ve applied for new credit and, if they see too many, they start seeing red flags. New credit applications account for 10% of your credit score pie, so only apply when it’s absolutely necessary. A hard credit inquiry does impact your credit score.

Types of credit. Another 10% of your credit score is made up by the types of credit that you have. Revolving debt like credit cards should be on the low side while non-revolving debt, including car loans, home mortgages and student debt, can be a little bit higher.

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