What Factors Affect Your Credit Score?

What Factors Affect Your Credit Score

Your credit score is a simple three digit number that demonstrates to lenders how likely you are to repay back a loan. Banks use your credit score when you apply to any loan, such as a mortgage, business loan, line of credit, as well as car and student loans. As a lower credit score can prohibit your chances of getting better rates on the money that you borrow, a high credit score is important to achieve. So what are the factors that your credit score takes into account, and how can you build and maintain your credit score? 

Payment History 

Your payment history is the largest factor that affects your credit score, and is determined by how frequently you meet your credit card payments. Even just one missed payment can have a negative affect on your score, so make sure to at least meet the minimum payment or pay in full each month. There are several ways to make sure that you are meeting this requirement, including safeguarding money into a savings account to pay your credit card, or setting up a direct debit to pay the minimum payment. To stay out of overwhelming debt, you can also invest your own time into self-help resources such as through educational books, podcasts, online courses, or the likes of https://www.dtss.us/freedom-and-success-education.html

Credit Utilisation

This refers to the amount of money that you owe as a percentage of the overall credit line across all the credit cards that you own. Typically, it’s advisable to maintain low credit utilisation, with 30% or lower being the most optimal percentage. If you are preparing to apply for a new credit card, then it is advised to remain below 10%. Don’t forget, your credit utilisation is measured as an overall percentage of all the lines of credit you have access to. So, other ways to lower your credit utilisation could be to apply to a credit limit increase, or even get an extra credit card(s) to increase the overall credit line that you have access to while keeping your spending the same. 

Length of Credit History 

The length of your credit history is measured by the average age of all the cards across all your accounts that you have. Remember to keep your credit card accounts open regardless if they are not in use. Even if it’s just to buy coffee with once a month, it will help to increase the average length of your credit cards. 

Credit Inquiries

There are two types of credit inquiries, being hard credit inquiries and soft credit inquiries. A hard credit inquiry requires your permission and will occur when a lender checks your credit report in order to make a lending decision, for example when you apply for a credit card or a mortgage loan. Soft credit inquiries usually take placet when a company checks your credit in appliance to a background check, as part of pre-approval for a credit card, or when you simply check your credit yourself. For best results, limit hard credit inquiries to once or twice a year to allow your score to recover. 

Types of Credit Used

While this is the least crucial credit score factor, diversifying your credit accounts can help to improve your credit score. By demonstrating that you can responsibly handle several credit types, lenders will be able to have a broader view of your overall financial behaviour.

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