Your financial reputation boils down to a three-digit number known as your credit score. Your score is somewhere between 300 and 850 (the higher, the better) and it plays an important role in determining whether you’ll qualify for a mortgage and at what interest rate, whether you’ll be able to obtain a credit card and with what credit limit, whether an insurance company will sell you a policy, and more.
Three different credit bureaus are constantly analyzing information about your use of credit and debt, so you actually have three scores, although they should be very similar to each other. You should be able to obtain your score at no cost from your bank or credit union, mortgage lender, or credit card issuer.
Here are the five factors that impact your score, how much weight they carry in determining your overall score, and what (if anything) you can do about each one.
1 – Payment history — 35%
The single most important step you can take to build and maintain a good credit score is to pay your bills on time. Doing so creates a track record that gives lenders peace of mind about extending credit to you in the future.
So set alerts that remind you when your payments are due. Some of your bills are probably set up on auto-pay, such as your mortgage. For all others, such as a credit card, take the issuer up on its offer to remind you of an upcoming due date. And set up another reminder in your electronic calendar. This is extremely important, so do everything in your power to pay your bills on time.
2 – Amounts owed — 30%
This pertains to how much of your available credit you are using at any given time. Use too much and you may appear to be overextended. For this purpose, it doesn’t matter whether you pay your credit card in full each month (although you should do that). What matters is how much of your available credit you are using at some point each month when a credit bureau checks on this. The ideal is to use no more than 30 percent of available credit. Even better if you use less than 10 percent.
So, if you have a credit card with a $10,000 credit limit, even if you plan to pay your bill in full, keeping your charges to less than $3,000 per month—preferably less than $1,000 per month—will help your credit score.
2 – Length of credit history — 15%
The longer you’ve been a responsible user of credit, the better. This is one reason why it can be a good idea to set up a teenager as an authorized user on your credit card. They won’t be able to get a card in their own name until they are 21 years old or can show sufficient income. However, as an authorized user, they can start building a credit history by piggy-backing off of yours. Of course, only do this if your credit score is strong.
Be careful about closing old credit card accounts, especially cards you have had for a long time. Closing such accounts will shorten your credit history and that could lower your credit score.
Credit mix — 10%
The credit score formula looks favorably on people who are responsible users of both revolving credit, such as credit cards, and installment loans, such as a mortgage or auto loan. This is the one area where there are no recommended steps for strengthening your credit score. If you have a credit card but not an installment loan, you should not take out a new loan just for the sake of trying to boost your credit score.
New credit — 10%
When you fill out a new credit card application, that company will check your credit report. This “hard inquiry” can be seen by other lenders. So if you apply for a bunch of cards in a short period of time, that can affect your chances of getting loans or other accounts. If you’re buying something expensive and opening a credit card will save you some money, it may be okay. However, doing that frequently could lower your score.
Your credit score is constantly changing based on your use of credit. Taking the various steps mentioned above, especially paying your bills on time, will help keep your score strong.
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Matt Bell is the author of Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.