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5 Factors You Need To Know About Your Credit Score

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Credit plays a significant role in the trajectory of your financial freedom. It gives you access to capital and helps you get approved for loans and credit cards. In addition, your credit score is what lenders will use to determine if they provide you with credit and at what cost.

In today’s article, let’s talk about the five factors that may make or break your credit score.

They are your payment history, amounts owed, length of history, credit mix, and new credit. Let’s break it down one by one and, in doing so, determine how these five factors influence your credit score.

Payment History

Your payment history is an essential factor. It makes up a good 35 percent of your total credit score.

The simple rule here is always to pay at least the minimum due. However, if you have a surplus every month, consider spending some of it towards the balance. This will ensure you do not fall behind on payments and your credit score remains in good standing.

If you have an adverse payment history, start making payments as soon as possible. It’s challenging to get caught up, but it is certainly not impossible.

Another vital thing to remember is that you should never make late payments on accounts not secured by collateral (such as utility bills). If you cannot afford to make your bills, it’s always better to contact the company and work out a plan than risk damaging your credit score by making late payments.

Amounts Owed 

This factor looks at the percentage paid on your long-term loans and the rate of your credit card limit you’re using every month. 

For long-term debt like student loans, a higher percentage of the total loan paid shows you’re a reliable borrower. So, for example, if you have a student loan you’ve been working on for six years, and it’s 80% paid off, that’s good. 

But if you just financed a brand new BMW five series with $0 down and haven’t made a single payment yet, that isn’t good, both for your credit score and your net worth. 

Please don’t go out and finance five series with credit cards. Instead, use only a tiny percentage of your monthly limit. The smaller, the better. So, for example, let’s say you had a credit card with a $2,000 limit. If the balance on your statement is $190, it won’t raise red flags, but a $190 balance against a $200 credit line suggests that someone is pushing the limits of their means.

Credit History

This one handles about 1/6 of your credit score. This determines the age of your accounts, and how long they have been open also matters. The longer it’s been since you’ve opened a statement, the better it is because it’s seen as a sign that you’ve handled credit well over time.

For example, if you went ahead and took out a student loan ten years ago, that account is ten years old, even if you didn’t make a payment on it while you were still in school. Another example is if you got a new credit card five years ago, and you’ve kept it active, that account is five years old. 

Your credit score looks at the average age of all your active accounts. Once a student loan or other installment loan is paid in full, it no longer counts toward the length of your credit history. If you paid off an old account, it would hurt your credit score. It’s almost like this system was designed to keep you in debt for as long as possible.

 

Credit Mix 

Lenders like it when they can see you’ve got a variety of different active accounts. So it’s suitable mainly for your credit score. 

Having long-term loans, such as a mortgage and some student loan debt, and a couple of credit cards shows you’re good at managing several types of debt.

New Credit

If/when you apply for a new credit card or loan, the lender may ask for a copy of your credit report. They call this an inquiry. Inquiries aren’t the best for your credit score, and too many inquiries within a short period can hurt your score. 

I suggest you only apply for new credit cards or loans if you need them or are sure that you can pay them off in full every month.

Conclusion

As you can see, your credit score does not depend on any one factor. Instead, it’s a combination of several factors that make up your score. 

It’s essential to keep these things top of mind when applying for a loan or making payments on a credit card.

So if you’re thinking of applying for a loan or credit card, check out this informative article about Credit Score Basics And How You Can Improve Yours.

Rob Pene, the chief growth guy at Mission Driven Brand, LLC, left the polynesian islands to pursue his dream of higher education and entrepreneurship. He is a former professional baseball player, spent 6 years as a public school teacher, and has over 12 years of experience in sales and marketing. When Rob isn’t optimizing a website for conversions, he’s either hanging out with family, cooking & washing dishes, or on zoom teaching or coaching. Connect with Rob on his Insta

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