Your credit score is a three-digit number that represents your creditworthiness and is used by lenders and creditors to determine whether to approve your applications for credit and loans. A high credit score can help you qualify for better interest rates and terms, while a low credit score can make it more difficult to obtain credit and loans or result in higher interest rates and less favorable terms.
In this comprehensive guide, we’ll examine what determines your credit score, how to check it, and strategies for improving it.
What Goes into Your Credit Score?
Your credit score is calculated based on several factors, including your payment history, amounts owed, length of credit history, credit mix, and new credit. Here’s a closer look at each of these factors:
Payment History
Your payment history is the most crucial factor in your credit score, accounting for 35%. This factor looks at whether you make your payments on time and in full. Late payments, missed payments, and defaulting on loans can all harm your credit score.
Amounts Owed
The amounts owed factor accounts for 30% of your credit score and determines how much of your available credit you currently use. Lenders and creditors prefer to see that you’re using only a small portion of your available credit, as it suggests you’re responsible for your credit.
Length of Credit History
The length of your credit history accounts for 15% of your credit score. Lenders and creditors prefer to see a more extended credit history, which suggests you have a track record of responsible credit use.
Credit Mix
Credit mix accounts for 10% of your credit score and looks at the types of credit you have, such as credit cards, loans, and mortgages. Having a mix of different types of credit can help improve your credit score.
New Credit
The new credit factor accounts for the final 10% of your credit score and determines how frequently you apply for new credit. Using less credit in a short period can help your score.
How to Check Your Credit Score?
You can check your credit score for free from the three major credit bureaus: Equifax, Experian, and TransUnion. You’re entitled to one free credit report from each bureau every year. You can also check your credit score for free through online services like Credit Karma and Credit Sesame.
When you check your credit score, review it carefully to ensure no errors or inaccuracies. If you spot any errors, dispute them with the credit bureau as soon as possible.
Strategies for Improving Your Credit Score
Improving your credit score takes time, but there are several strategies you can use to help boost your score over time. Here are some of the most effective strategies:
Make Payments on Time
As we mentioned, your payment history is the most essential factor in your credit score. To improve your score, pay on time and in full each month. Consider setting up automatic payments to ensure that you never miss a payment.
Pay Down Debt
The amounts owed factor is the second most crucial factor in your credit score. To improve your score, pay down your debts and keep your credit utilization low. Aim to use at most 30% of your available credit at any given time.
Keep Old Accounts Open
The length of your credit history is essential to your credit score. To improve your score, avoid closing old credit accounts, even if you no longer use them. Closing an old version can shorten your credit history and harm your score.
Diversify Your Credit Mix
Having a mix of different types of credit can help improve your credit score. If you only have a kind of credit, such as credit cards, consider adding a loan or mortgage to your credit mix.
Avoid Applying for Too Much Credit at Once
Applying for too much credit quickly can harm your credit score. Avoid using multiple credit cards or loans at once to improve your score.
Monitor Your Credit Report Regularly
Monitoring your credit report regularly can help you spot errors or inaccuracies impacting your score. Check your credit report at least once a year and dispute any errors or inaccuracies with the credit bureau.
Work with a Credit Counselor or Financial Advisor
If you need help to improve your credit score on your own, consider working with a credit counselor or financial advisor. They can provide guidance and strategies for improving your score and help you develop a more effective plan for managing your credit.
Conclusion
Your credit score plays an essential role in your financial life, impacting your ability to qualify for credit and loans and the terms and interest rates you’ll be offered. By understanding what goes into your credit score and using strategies for improving it, you can help ensure that you have a strong credit profile and access to the credit you need to achieve your financial goals.
Remember to make timely payments, pay down debt, keep old accounts open, diversify your credit mix, avoid applying too much credit at once, monitor your credit report regularly, and work with a credit counselor or financial advisor if needed. With time and discipline, you can improve your credit score and achieve economic success.
