Your credit score is the number lenders use to determine your risk as a borrower. It’s not the same as your actual FICO score, but it is based on the same formula. Many factors affect your credit score, and if any of them are out of order, you can see some dramatic effects on your financial health.
Affecting Your Credit Score
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The second factor that affects your credit score is how much of the available credit you use. Credit utilization is the amount of your debt compared to your total credit limit. Suppose you’re using more than 50% of your total limit. In that case, this may negatively affect your credit score because it appears that you cannot pay down any of the money in an installment loan or revolving credit, such as a line of credit or store card. On the other hand, using less than 30% of your available limit can be beneficial because it shows lenders that they can trust you with more money in future loans based on their confidence in how responsible you are when handling existing debt.
The number of credit inquiries is the number of times you have applied for credit in a given time period. The more you apply for credit, the less likely you are to be approved for a loan. The less you apply for credit, the more likely you are to be approved for a loan.
If you’re a good borrower and pay your bills on time, this will help build up your credit score. Paying late can cause problems—and even lead to increased average credit card interest rate and fees. It’s best not to miss payments at all, but if it happens, contact the company immediately and try to work out a new payment plan that works for both of you.
One of the most important factors that affect your credit score is the length of your credit history. Credit history length is calculated by adding up the number of years each account has been open, and it can be used to predict how likely you are to pay back loans and debts. There are two reasons why having an extensive credit history is beneficial:
- First, if there’s a significant gap between accounts, lenders may worry that you haven’t had any recent experience managing debt—and they’ll be less likely to approve new loans or other forms of credit in your name.
- Second, suppose you’re deciding between two applicants with similar financial backgrounds but different lengths of credit history (such as one with an established 20-year track record in good standing versus another who only recently got their first card). In that case, it may tip the scales in favor of someone with more experience handling debt responsibly.
Credit mix, or the ratio of different types of credit cards, is important for more than just helping build a strong credit score. It also shows whether you are responsible for your money and can handle multiple accounts simultaneously. If someone only has one credit card, they may not like paying bills on time or using their credit wisely. However, if they have a good mix of different types of cards—like a department store card and an airline rewards program—they’re likely to use their money responsibly and are more likely to have a good credit score. The professionals at SoFi state, “Your credit score determines how risky of a borrower you are, so your interest rate could reflect your creditworthiness.”
It’s important to understand that your credit score isn’t a magic number. It doesn’t determine whether or not you deserve something, but it does help lenders make decisions about whether or not they should lend money to someone who wants it. The most important element for your credit score is having a diverse mix of credit accounts (such as mortgages and car loans) and demonstrating positive payment history over time.