What makes up your credit score?
Your credit score may seem like a personal judgment on your character, but the factors that go into it are actually determined by research and analysis of data about how people use credit. Here are the major factors that go into your score:
Your payment history
Do you make all your payments on time? Or did you miss a payment or pay late? Your payment history is based on borrowed funds that are paid back over time, usually with interest. Your lender will report your payment history to one or more credit bureaus on a monthly basis. Pay on time, every time, and your payment history will maintain your credit score or improve it.
Utilization of your credit or how much you owe on credit
This means how much you use of the credit available to you, or how much you owe on credit. If you have two credit cards, each with a spending limit of $2,000, charging up to the max on both can ding your credit score. If you use 30% or less of the credit you have available, you will have a desired credit profile in the eye of a lender.
Length of your credit history
How long have you been using credit and paying responsibly? If you are just starting out, you may have shallow credit or a “thin file.” To build a good credit history, simply use credit and pay responsibly over time. Most people start out by getting a credit card.
Your credit mix/types of credit you have
This refers to how many different types of credit you have, e.g. a credit card, a student loan, a car loan. A mix of credit shows how well you handle multiple different payments. But don’t take out a loan you don’t need just to have a credit mix. Use and pay your credit card responsibly over time and you can build credit.
New credit you apply for
If you apply for several credit cards in a week, that is a red flag for lenders. Sometimes people who are in financial trouble may apply for a lot of credit at once to try to get by. Research shows that applying for a lot of credit in a short time period is a risk identifier for lenders.
Your credit score and credit report are not the same thing
Other things are reported to credit bureaus as well as the factors above, e.g. your address, a name change, and sometimes employment history. These might be part of your credit report, but not your credit score. Your credit score is a number that lenders look at to determine how likely you are to pay them back. The scores range from 300 (really bad) to 850 (amazing). If you score under 660, you could have trouble getting a car loan at a decent rate. Shoot for 700+ for access to favorable loan rates and premium credit cards that provide rewards. Why care about your score if you don’t plan to use credit? Life happens. If you do find yourself needing a loan, e.g. for home improvement, car repair, medical expenses, you want to be sure that you can get a loan at a good rate.