These 5 factors count most toward your credit score

These 5 factors count most to your creditworthiness
Your credit score is three little digits that hold a lot of power.
A good score shows lenders that you are a safe choice for a mortgage, car loan, or corporate finance. You can use it to open credit card accounts and determine your interest rates. Even landlords investigate creditworthiness when evaluating potential tenants.
The credit scores are tabulated based on the information in your credit reports. But how does it work? Five factors are the most important in determining your score.
How your credit score is calculated
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FICO, the most widely used credit scorer, gathers your financial information with the three major credit bureaus Experian, Equifax and TransUnion. A number of points between 300 and 850 is then awarded.
The credit bureaus have different criteria for collecting data, so your score can vary slightly between the three. If you don't know your credit history, it's easier than ever to take a free look and see where you stand.
FICO is based on these five points: "very bad" to "exceptional":
Your Payment History: It counts as 35% of a FICO score.
Your credit utilization: it counts to 30%.
The length of your credit rating 15%.
Your credit mix: 10%.
New credit: 10%.
As you can see, the categories differ in their meaning. Let's take a closer look at each one.
1. Payment history
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Since payment history is the most weighty factor, it is important that you make your loan payments on time. Even a late payment has a negative impact and can stay on your file for up to seven years. Over time, catching up on your bills and staying on top of things will become less important.
Debt that is collected is even more harmful. So don't let your creditors go after you. Call them at the first sign of problems, preferably before invoices are due or late.
Many lenders will work with you on a repayment plan or schedule a more convenient due date. Taking out a debt consolidation loan can help you get your debt under control - and improve your credit score.
2. Use of credit
A debt-to-credit ratio compares how much credit you are using to how much is available. Add up all amounts owed to calculate. Next, add up all of your spending limits. Divide the first total by the second to get your usage rate.
Creditors disapprove of quotas over 30%. If your spending limit on a card is $ 6,000 and your balance is $ 2,500, your usage rate is 42%. That will hurt your credit score.
A utilization of zero to 10% is ideal. So work on paying back your balance before you run into more debt. And don't be too quick to cancel credit cards as it can decrease your available balance and potentially increase the percentage of the balance you are using.
3. Length of credit history
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There's another good reason not to be too eager to close accounts even after the final payment: lenders prefer to do business with borrowers who are experienced with credit.
FICO takes into account the average age of all of your accounts and the age of the oldest. Provided your records are squeaky clean, maintaining long-term relationships with creditors will improve your credit score.
4. Credit mix
The credit mix you are using doesn't weigh as much as the first three categories, but it's worth keeping in mind.
Lenders want you to be able to responsibly manage different types of accounts.
A healthy mix could include a personal loan, a car loan, a couple of credit cards, and a home loan - hopefully at one of the lowest mortgage rates ever.
5. New credit
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New credit is also a minor factor in determining your creditworthiness and can either help or hurt your score.
A new account can increase the amount of credit you have - and decrease your credit utilization. But a flood of loan applications all at once can set off alarm bells. Lenders will wonder if you've been laid off at work or are living beyond your means.
As you are trying to build a more stable credit mix and increase your score, do so gradually. Don't apply for a mortgage, a car loan, and three credit cards at the same time.
Other things that may or may not affect your credit score
Your FICO score does not reflect your wealth, income, occupation, or age.
Your history, utility bills, phone bills, and other expenses didn't previously matter, but that may change. For one, Experian now offers to include monthly bill payment if that improves your score.
When applying for a new loan, lender inquiries may have a slight and temporary impact on your score. It usually recovers after paying on time for a few months. In the meantime, checking your score will have no effect.
VantageScore: An Alternative to FICO
Courtesy of VantageScore
Another credit scoring model called VantageScore is catching on. The criteria are similar to those of FICO, but the categories are weighted differently.
This is how the latest version of VantageScore, VantageScore 4.0, is calculated.
Payment History: It counts 41% of a VantageScore.
Use of credit: it counts at 20%.
Credit rating and mix: 20%.
New credit: 11%.
Credit: 6%.
Available credit: 2%.
VantageScore 4.0, which was introduced in 2017, attaches less importance to past credit behavior. You'll love this feature if you have a tarnished record but have changed your behaviors.
The VantageScore website recommends keeping the debt to credit ratio below 30%, diversifying account types, and keeping accounts in good shape and open for as long as possible.
VantageScore is more generous than FICO in several ways. Scores are not affected by paid or unpaid collections less than $ 250. Accounts hit during a natural disaster are not taken into account.
Knowing your score - and keeping it nice and high - can make all the difference in the quality of your financial life. If you use a service that gives you a free credit score, make sure that you are also offered free credit monitoring.

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