We all know that the credit score plays a key role in our financial life. You will understand the importance of your credit score when you take out a new credit card or purchase a home.
With a poor credit score, you will not get approval for the desired credit card or loan that you are aiming for. If you get the approval, you may not be offered favorable interest terms.
Thus, building a good credit score is important. However, many of you are not aware of how a credit score is determined.
If you have a fair idea about how a credit score is determined, it becomes easy for you to take the necessary measures to improve your score.
The most popular credit score model in the country is the FICO score, developed by the Fair Isaac Credit Organization (FICO). A credit score ranges between 300 and 850. A credit score in the range of mid 700 or more is considered excellent.
Read this article to learn more about the 5 credit score determining factors.
1. Payment history
Payment history is the biggest determinant of your credit score. It accounts for approximately 35% of your credit score. Default and late payments can seriously hurt your credit score.
2. Amount Owed
The amount that you owe on various credit cards significantly hurts your score. In fact, this credit score factor accounts for 30% of your score. If you keep multiple credit accounts, it implies that you are financially overextended. To ensure that this factor does not negatively impact your score, try to ensure that you do not cross the credit limits of all your credit cards.
3. Length of credit history
The length of your credit history can have a positive impact on your credit score. Long credit history may imply that you can manage your credit over time in a nice way. Since the share of this factor in determining your credit score is 15%, so you should not make the foolish move of canceling your old credit card, as it will eliminate all the history associated with that card.
4. New credit
The share of new credit in determining your credit score is 10%. People nowadays take out any credit cards. But this is indeed a very risky idea, particularly in case you have a brief credit history. In fact, each of your credit card applications can have a negative impact on your score.
5. Types of credit in use
This factor accounts for 10% of your credit score. You need to ensure that all of your debts are not in the form of credit cards. Instead, you must try to diversify your debts into credit cards, auto loans, mortgage loans, student loans, etc.
This discussion will help you understand how a credit score is determined. This will also help you take the right steps to improve your credit score quickly. And, with an improved score, you will be able to get approved for a loan or credit with better terms.