The 5 Primary Components That Shape Your Credit Score

Your credit score plays a significant role in determining your financial well-being and opportunities. Lenders, landlords, and even potential employers rely on this three-digit number to assess your creditworthiness. Understanding the primary components that factor into your credit score empowers you to make informed decisions and take proactive steps to maintain or improve your creditworthiness. In this article, we will explore the five key elements that contribute to your credit score and provide helpful tips for each category.

1. Payment History:

Payment history is the most influential factor in determining your credit score, accounting for approximately 35% of it. It reflects your ability to make timely payments on credit accounts and loans.

Tips to maintain or improve your payment history:

  • Pay your bills on time: Set up automatic payments or reminders to ensure you never miss a payment. Late payments, even by just a few days, can have a negative impact on your credit score.
  • Communicate with creditors: If you're facing financial difficulties, reach out to your creditors and discuss possible solutions, such as setting up a payment plan. Some creditors may be willing to work with you during challenging times.

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2. Balances Owed:

The amount of debt you owe relative to your available credit, also known as credit utilization, accounts for about 30% of your credit score. High credit utilization suggests potential financial instability.

Tips to maintain or improve balances owed:

  • Keep credit utilization low: Aim to use no more than 30% of your available credit at any given time. Paying down balances and avoiding maxing out credit cards can positively impact your credit score.
  • Consider multiple payments: If you have high credit card balances, making multiple payments throughout the month can help keep your credit utilization ratio low, even if you use your card frequently.

3. Length of Credit History:

The length of time you have held credit accounts contributes approximately 15% to your credit score. A longer credit history demonstrates your experience managing credit responsibly.

Tips to maintain or improve your credit history:

  • Keep old accounts active: Closing old credit accounts may seem like a good idea, but it can actually shorten your credit history. Instead, use those accounts occasionally to keep them active and in good standing.
  • Become an authorized user: If someone you trust has a long and positive credit history, ask if they can add you as an authorized user on one of their credit cards. This can help boost your credit history, but ensure that the primary account holder uses credit responsibly.

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4. New Credit:

Opening new credit accounts contributes about 10% to your credit score. Applying for and obtaining new credit can indicate increased financial risk.

Tips to maintain or improve new credit:

  • Limit credit applications: Avoid making multiple credit applications within a short period. Each application generates a hard inquiry on your credit report, which can temporarily lower your score.
  • Diversify credit inquiries: If you're shopping around for the best loan or mortgage rate, complete your applications within a 14- to 45-day window. Credit scoring models typically consider multiple inquiries for the same type of loan as a single inquiry, minimizing the impact on your score.

5. Credit Mix:

Having a diverse mix of credit accounts, such as credit cards, loans, and mortgages, contributes about 10% to your credit score. It demonstrates your ability to handle different types of credit responsibly.

Tips to maintain or improve credit mix:

  • Avoid excessive credit applications: Applying for numerous credit accounts within a short period can negatively affect your credit score. Focus on maintaining a healthy mix of credit accounts over time instead.
  • Use caution with new credit types: While diversifying your credit mix is beneficial, only open new accounts if they align with your financial goals and you can manage them responsibly.

Understanding the primary components that contribute to your credit score empowers you to take control of your financial well-being. By following the tips outlined above for each category, you can maintain a healthy credit score or work towards improving it. Remember, building and maintaining good credit is a long-term commitment, so be patient, responsible, and consistent in your efforts.

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NMLS #1403, NYS Licensed Mortgage Banker

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