What is a Credit Score?
A credit score is a three-digit number that represents your creditworthiness. It's calculated based on your credit history and is used by lenders and creditors to determine your risk level when it comes to borrowing money. The most common credit score used in the US is the FICO score, which ranges from 300 to 850.
How is a Credit Score Calculated?
Your credit score is calculated based on five key factors:
Payment history: This accounts for 35% of your credit score and reflects how timely you have been with your payments. Late payments, missed payments, and delinquencies can have a negative impact on your score.
Credit utilization: This accounts for 30% of your credit score and reflects how much of your available credit you're using. High credit utilization can indicate that you're overextended and can negatively impact your score.
Length of credit history: This accounts for 15% of your credit score and reflects how long you've had credit accounts open. The longer your credit history, the more stable you appear to lenders.
Types of credit: This accounts for 10% of your credit score and reflects the mix of credit accounts you have, such as credit cards, loans, and mortgages. A diverse mix of credit can be seen as a positive factor.
New credit: This accounts for 10% of your credit score and reflects how frequently you're applying for new credit. Too many inquiries in a short period can be seen as a red flag by lenders.
How to Improve Your Credit Score
Pay your bills on time: Late payments can have a significant negative impact on your credit score. Set up automatic payments or reminders to ensure you pay on time.
Reduce your credit utilization: Aim to use no more than 30% of your available credit.
Keep old credit accounts open: The longer your credit history, the better it is for your score. Don't close old credit accounts, even if you're not using them.
Diversify your credit mix: Having a mix of credit accounts, such as credit cards and loans, can be seen as a positive factor by lenders.
Don't apply for too much new credit at once: Too many inquiries in a short period can negatively impact your score.
Your credit score is an important factor in your financial health. It's important to understand how it's calculated and how you can improve it. By paying your bills on time, reducing your credit utilization, keeping old credit accounts open, diversifying your credit mix, and not applying for too much new credit at once, you can improve your credit score over time. Remember, a good credit score can open doors to better financial opportunities, so it's worth the effort to maintain a healthy score.
