Your credit score is calculated based on several factors. Some you may know, such as paying your bills on time and how long you have used credit. You may also wonder, “do stocks affect credit score,” or “does maxing out your credit card hurt credit score?” Lots of different factors affect credit scores, and knowing them will help you be prepared in the long run.
Unfortunately, for many people, there are a lot of unknown factors related to their credit score and situation. This can make things confusing for them and cause harm to your score in the future.
Determining Credit Scores
Modern credit scoring companies will determine your score based on the information found in your credit report. Even though these companies will not reveal the specific formula they use, the “basic ingredients” used to calculate your credit score are known to us.
You may wonder why this matters or why you need this information. The fact is that credit impacts many other parts of your life. For example, your credit score will determine if you can get a new credit card, car loan, and affects your interest rate on new credit. It also determines if you can purchase a house or get an apartment with a mortgage, and how much of a security deposit you have to pay on utilities or insurance.
The Factors That Affect Credit Scores Most
Two main companies determine your credit score, these being FICO and VantageScore. The way they determine these scores differ slightly; however, the companies agree on two factors that are the most important. These two factors include:
- Your payment history
- Your total credit utilization
Credit utilization refers to the number of your credit limits that you are using. In fact, these two factors make up more than half of how your credit score is determined.
If you are trying to improve your credit score, it is imperative to focus on these two things first.
Your credit history records your payment history. It lets creditors know if you have paid your obligations and bills on time.
According to FICO, your payment history makes up 35% of your total score. While VantageScore doesn’t reveal the percentage amounts, it has stated that payment history is “very influential.”
To improve your payment history, be sure to pay your bills on time. If you pay your bills late, by 30 days or more, your score will drop. The later you pay after the due date, the more damage will occur.
How much of your credit limit are you using? Usually, this is expressed as a percentage and is called credit utilization. FICO has stated that how much credit you use accounts for approximately 30% of your score. VantageScore stated that credit utilization is “very influential.”
Most experts recommend that you avoid exceeding 30% of your total available credit. People who have higher credit scores use much less than that.
Other Credit Score Factors to Know
After mastering making payments on time and making sure you keep your credit utilization low, you need to focus on other credit factors, too.
The other credit factors you need to consider include:
Total Debt and Balances: It is important to take steps forward and continue paying off your debt. Also, assessing an over-limit fee affects credit score, too, so paying on time is a must.
How Long You Have Had Credit: When it comes to your credit score, the longer you have had credit, the better. Because of this, you should maintain your older accounts unless you have a viable reason to close them.
Your Credit Mix: It’s a good idea to have different types of credit accounts, such as mortgages, car payments, and credit cards.
When You Last Applied for New Credit: Every new credit application you submit results in a hard inquiry on your credit and can take several points off your score.
Factors That Don’t Affect Your Credit Score
While there are more than a few factors that will impact your credit score, others don’t. For example, you may wonder if refinanced student loans affect credit score. Keep reading to learn the factors that will not impact your credit score at all.
Bank Balances and Income
Your credit report may contain some information about employers, but it is only used for matching account data to the right individual. Getting a raise will not increase your score, nor will your investment accounts, checking, or savings accounts.
Utility and Rent Payments
In most situations, your utility nor rent payments will be reported to the credit bureaus. This means they will not impact your score. The one exception to this tool is if you are using a rent-reporting service. Also, if you are late on utility payments, this may be reported to the credit bureaus.
Requesting Your Credit Score
If you request your credit score through a service or your bank, it won’t impact your score. That’s because when you check your score, it is a soft pull on your credit. You can look at your score as often as you like without impacting it.
How to Use Your Newfound Knowledge
The credit scoring companies (mentioned above) will review your credit reports to determine how you are doing on each of these factors. Once that is done, the companies will determine your score from the data collected. It is possible to see the same things that they do when you check credit reports yourself.
It is good to use the information you have found here to focus on making payments on time and keeping your balance low compared to your total credit limits. These are the things that have the biggest impact on your overall score. Some services will provide you with score tracking benefits, and these can help you keep up with what is going on with your credit. In the long run, understanding your credit score and what factors impact it will pay off and help ensure you can make smart and sound financial decisions. Being informed is half the battle when it comes to your financial situation.
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