If you want to improve your credit score, there are credit factors that need your attention. It’s not enough that you just pay off what you owe. You need to make sure that these factors are all good as well. It’s the best way to improve and maintain a good credit standing.
It’s actually not complicated to do. In fact, the average FICO score rose to 711 despite the pandemic. You just have to make sure you understand what affects your credit score. If you know what makes it go up or down, then you’ll know what to avoid to maintain a high score. You can make better decisions about how you use credit.
Because the truth is, eliminating debt is not the answer. It won’t ensure that your finances will be okay. What you have to do is to learn how to manage your debt properly. And one of the best ways to practice doing that is by learning how to keep your credit score high.
So what are these credit factors that you have to look into?
Credit factors that affect your credit score
There are 5 factors that affect your credit score. Each of these factors has varying effects on your score. Make sure you understand how each of these weighs on your score so you know how your actions affect it.
Here are the 5 credit factors you have to consider.
This is the one that has the biggest impact on your credit score. In a FICO Score model, this is 35% of your score. So if you miss out on a payment, it can really have a huge effect on your credit standing. Take note that this is not just about meeting the due date. It’s also about meeting the minimum payment amount.
With everything that’s going on around us, this can be a real struggle for a lot of Americans. But if you are going through a rough time, don’t just stop making payments. You have to tell your creditors and lenders about your situation. That way, they can work with you on your debt issues.
Believe it or not, your creditors and lenders have programs in place to help people who are struggling with their payments. They know that life can throw you a curveball and it can suddenly make it harder to pay off your debts. But that doesn’t mean you should ignore the problem. When you find yourself having a hard time paying off your monthly dues, consider using deferral programs. This is what 1 out of 4 Americans have done – they started to take advantage of deferral programs to help with their debts. Instead of letting the pandemic ruin their finance, they took action and became proactive about it.
That’s how you can miss out on payments without ruining your credit score.
The second of the credit factors is credit utilization. This is the relationship between your credit limit and balance. Some people only keep their eye on the credit limit. As long as they don’t meet this limit, they think they are okay. But that’s not true. You have to make sure that the credit utilization rate is only 30%.
So if your limit is $10,000 and your balance is $5,000, you have a credit utilization rate of 50%. This is not acceptable. That limit should only have $3,000 as the highest balance that you have. You should not use credit if you’ve gone beyond this. Pay it off until your balance goes down before you can use credit again. This is one of the effective strategies to maintain your debt level. When you monitor your debts, make sure it does not go beyond 30%.
The third credit factor that you should keep an eye on is the age of your credit accounts. The rule is, the older the accounts, the more positive effect it has on your credit score. So if you have old accounts, don’t close these. If you do, the average age of your accounts will go down. It will also erase the credit history associated with it. This will make your records thinner and it’ll affect the data used to calculate your credit score.
Oftentimes, this is affected when you decide to close a credit card account. Especially if you’re closing an old one. Consider the effect it will have on your credit records before you do this.
The fourth of the credit factors that you have to take into consideration is the new credit that you decide to open. Sometimes, we are faced with the need to apply for new credit. Like maybe getting an emergency loan to help us out of a tight financial situation. If it’s what you need to get medical treatment for yourself or a loved one, then you don’t really have a choice. Or if it’s what you need to save your business, you won’t think twice if you have the option to borrow money. It’ll make things easier for you to focus on the current situation.
While having the borrowed money will help you get past your current crisis, it might cause your credit score to go down. A loan application will lead to a hard inquiry on your credit report. This will cause it to go down.
Make sure that you shop around first before you submit your application. And try not to borrow more than one loan at the same time.
The last of the credit factors that affect your score is the credit mix. Take a look at all the debts you owe. What type of debts are they? Having a good mix of revolving and non-revolving debts will have a positive effect on your score. This means having both credit card debts and a personal loan or mortgage will improve your credit score.
Of course, the type of debt is not as important as your ability to pay these back. So if you’re borrowing just for the sake of having a good credit mix – don’t. Borrow money because there’s a real need for it and you have the ability to pay it back. Otherwise, the positive effect on your score will only be temporary soon, it’ll go down because as it turns out – you can’t pay it back.
Benefits of improving your credit score
Understanding these credit factors will not just help you improve your credit score. It will also bring a couple of benefits to your life as a result.
Here are two of the most important ones.
Better credit terms
Your credit score is a basis for creditors and lenders in determining what your credit risk is. If you have a high credit risk, there’s a higher chance that you won’t pay off what you owe. This will prompt them to give you a high-interest rate on the credit account that you’re applying for. It’s what they do to protect themselves from risky borrowers.
But if you have a good credit score, you will be deemed a low credit risk. The creditors and lenders won’t feel the need to protect themselves. That means you can expect to get the best credit terms every time to apply for a new credit card or loan.
Better financial habits
When you pay attention to the credit factors that affect your credit score, it’ll help you develop the right financial habits along the way. For instance, if you want to make sure that you can keep a great payment history, you’ll have to do some budget planning. It ensures that you’ll always have the fund to meet your monthly debt payments. Monitoring your credit score will also make you more cautious about how you spend your money – specifically how you use credit. These are effective ways to practice the right habits that’ll help improve your financial situation as a whole.