Maintaining a Good Credit Score for Dummies 

In today’s age, your credit score dictates many things that you can and cannot do. This is especially true for financial transactions, like applying for home loans. So, managing a good credit score is essential for everyone.

But have you ever thought about what components form your credit score and how you can keep a favorable number? 

Don’t fret because we’ve made a list explaining each major factor and its corresponding value. Plus, we’ve also included some helpful insights to get a better number. 

Main Factors That Influence a Credit Score

Your credit score is a combination of different factors. Let’s look at the components that make up your total score and see how you can manage them for a better result.

Payment History

This plays the biggest role in determining your credit score, as it tells the lender the likelihood of them getting the money back. Your payment history roughly amounts to 35% of the total score. Factors that fall under payment history include:

– Number of on-time and late payments

– How long were you late on the payments if any

– Any account closed due to bankruptcy, debt settlement, lawsuits, foreclosures, or forwarded to collections 

– Last time a late payment was made and frequency of late payments.

Tips for a Strong Payment History Score:

– Make sure your credit card, mortgage, or other payments are made on time. Lenders love to see customers that make on-time payments. Plus, the less frequent your late payments are, the better the score will be.

– If you’re running late on payments, settle them as soon as possible. The later your payments are, the lower the number on your credit score.

– Avoid having accounts forwarded to collection agencies, as it’s a red flag for potential lenders. 

Amounts Owed

Next on the list is how you use all your available credit limits, which count as 30% of your total credit score. Also called credit utilization, major credit scoring agencies compute your credit utilization ratio. The ratio refers to your total debt compared to your available credit across various credit types. 

Contrary to what you’re thinking, it’s not good to have a zero balance on your available credits. Having no credit owed won’t tell lenders your creditworthiness, thus may negatively affect your overall score. 

Tips for a Strong Credit Utilization Score:

– Credit experts advise that you use your available credits but keep them less than 30% of the total amount. You’re hitting two birds at once, as it shows that you do use credit, but not too much that you’ll pose as a risk. 

• To ensure you’re not exceeding 30%, you can set up alerts on your credit apps to keep you updated.
• If ever you go overdue to unforeseen expenses, you can also make extra payments for that month.

Length of Credit History

How long you’ve had credit accounts help influence your final credit score, though it only counts for 15%. This looks at the age of your oldest and newest credit accounts, along with the average age of all your existing credit accounts.

Lenders typically favor those with a longer credit history, as it could show an applicant’s creditworthiness. However, these accounts must also show a good payment history to work in favor of you. 

Tips for a Favorable Result on Credit History Length:

– Keep your old accounts as long as possible, even if you’re not using them. Old accounts boost your final credit score by a large margin.

– If in a pinch, you can take over old credit accounts, as long as they’re in pristine condition. 

Types of Credit

Developing a diverse credit portfolio is an excellent indicator of how you utilize credit and establish creditworthiness. These could include home loans, credit cards, and car loans. While it only amounts to 10% of the total score, it could make or break your loan application. 

Tips for Scoring High on the Credit Mix Category:

– Secure and maintain credit accounts on various products, though avoid opening several simultaneously (we’ll talk about that next).

– Make sure these accounts have a history of on-time payments and proper utilization, as it could affect the other factors.

New Credit

Lastly, we have your new accounts to consider. Roughly equal to 10% of your total credit score, agencies check how many credit applications or new accounts you have opened recently. This also counts the number of hard inquiries reflect on your credit.

What’s a hard inquiry, you ask? It’s a detailed report about your credit, pulling out your credit score, etc. When you apply for a line of credit, lenders run a hard inquiry to check your credit score. 

Unfortunately, it affects your final credit score, and multiple hard inquiries drastically decline the score. Also, when frequent hard inquiries show on your profile, it could indicate that you’re a potential risk for them. This lowers your chances of approval, something that we don’t want.

Tips for an Excellent New Credit Number:

– Avoid applying for multiple lines of credit at the same time or within proximity of each other. 

– If you need to know or update your score, make a soft inquiry instead. Soft inquiries are when you ask for information from credit agencies. 

Make Your Credit Score Work for You

Maintaining a good credit score isn’t as difficult as it looks, as long as you know what you’re doing. Though it could take time and a proper strategy, securing the loan you need will be easier with a better credit score.