Most people with bad credit scores want to improve their credit rating. There’s just one major problem. They don’t know where to start. Considering that the road from a bad credit rating to a good credit rating can be long and complicated, it’s really important to know where you stand in the first place.
Before you can improve your credit score for the better, there are two things you need to do. One is to check your credit reports and scores. And two, you need to understand the key factors influencing your credit score. This guide will help you understand how your credit rating is formulated.
What is a credit score?
Your credit score put simply, represents your creditworthiness as a borrower or consumer. The score falls in a range depending on the type of score used. If it’s a FICO score, for example, the credit score range is from 300 to 850. If your score is 300, that means a poor credit rating while 850 means excellent credit rating.
When you have a poor credit score, it follows that your creditworthiness is very low. This translates to high risks for lenders hence a likely rejection of application for personal loans, mobile phone contracts and other financial products.
What are the elements of your credit score?
Sticking with the FICO score as example, it is broken down into five different elements or categories. These categories are what affect your credit score and they include:
35% of your credit score is attributed to your payment history. This is why experts continue to reiterate time and time again why it’s very important to pay all your bills on time. If you want to boost your credit rating or keep it at an excellent standing, paying your bills on time is a must. Remember, it contributes the most percentage to your credit score. It’s no state secret really. Pay your bills on time and your credit score is safe.
Amount of debt owed
The amount of debt you owe is another important aspect of your credit rating. In fact, it is 30% of your credit score. When checking your credit score, most lenders or financial institutions look at whether you’re close to your credit limits or not. If you want to keep your credit score on the excellent side, it is advisable to keep your balances low or your amount of debt owed low in general.
The age of your credit history is 15% of your credit score. If you have older accounts, those are actually better for your credit. If you’re just starting to build your credit history, there’s no other way around to it. In any instance, the trick is to build credit like any responsible consumer would. So long as credit references see that you have a good history, your credit score will be an asset for you.
New credit inquiries
Though credit inquiries only make up 10% of your credit score, these inquiries still affect your credit rating. Whenever a lender or financial institution reviews your credit rating, there’s an inquiry created. Limiting you credit inquiries makes sense if you’re in the process of boosting your credit score.
Types of credit
The last category that constitutes 10% of your score is the types of credit you have. If you want a high score for your credit rating, having a mix of different types of credit will help. This means that you’d do well if you have a diverse type of accounts such as mortgages, credit cards, auto loan and more.