Do you feel like you need advanced expertise to assess what is impacting your credit score? Fortunately, you don't, as figuring it out is rather simple. Behind the figure itself (credit scores usually range between 300 and 850), five major factors are used in credit score calculation. Those scores are used by lenders to determine how likely you are to repay your debt. Hence, those scores are typically the deciding metric in evaluating whether or not you will get a new loan.
When there's a change in your financial profile, your score reflects that, too. Thus, knowing what factors and types of accounts impact your credit score helps you improve it over time.
Payment history
Payment history is the most crucial factor in credit scoring. If you miss even one payment, your score can be negatively impacted. Lenders want surety that the debt will be repaid on time when they are considering you a candidate for new credit. The payment history determines 35 percent of your FICO score, and 90 percent of lenders use this score.
Amounts owed
Your credit usage is the next most significant metric in your credit scores, especially as shown by your credit utilization ratio. The credit utilization ratio is obtained by dividing the total revolving credit being used at present by the sum of your revolving credit limits. This ratio examines the amount of available credit being utilized. It also demonstrates how dependent you are on non-cash funds. A negative sign for creditors is when over 30 percent of your available credit is being used. Credit utilization determines 30 percent of your FICO score.
Credit history length
The amount of time you've held various forms of credit, account for 15 percent of your FICO score. This comprises the age of your newest and oldest credit account, as well as the average age of all your accounts. Typically, the higher your credit scores, the longer your credit history.
Credit mix
Individuals with high credit scores usually maintain a diverse portfolio of credit accounts. This may consist of credit products such as a car loan, credit card, student loan, or mortgage. Credit scoring models factor in the kinds of accounts and how many you have. This indicates how well you manage a wide selection of credit products and makes up for 10 percent of the score report.
New credit
The total number of credit accounts you've set up of late, and the hard inquiries made by lenders when you enroll for credit, is what the last 10 percent of your FICO score is about. Too many accounts or inquiries can signal higher risk.
