There are many websites that advertise giving you your credit score for free. That’s great because knowing your credit score is important. However, it is also important to know what makes up your credit score.
Your credit score affects your ability to get loans and financing for houses, cars and other big purchases; the better your credit score, the better options you have for financing. In order to improve your credit score, it is important to know what goes into it.
A FICO score is a commonly used type of credit score. FICO creates a credit score made up of 5 factors. These factors include: Payment History, Credit Utilization, Length of Credit History, New Credit and Credit Mix.
Payment History makes up 35% of your credit score and it consists of how well you have paid off previous debts. This is probably the most important category because they use past behavior as a good indication of future behavior. That makes making payments on time and in full very important.
Credit Utilization is 30% of your score and it is based on the amount of credit that has been borrowed. People that often max out credit cards are not a good sign for future borrowing.
Length of Credit History is the third category and it accounts for 15% of the score. This piece looks at how long each credit account has been open and the length of time since the most recent account action. That means if you are new to having credit, you credit score will automatically be a little bit lower; it will take a little time to build up a good history.
New Credit takes up 10% of your score. This is how many new lines of credit you have opened up recently. You don’t want to try to open up too many at the same time because it could indicate you aren’t handling credit responsibly.
Credit Mix also takes up 10%. For this part of the score, they want you to have a variety of types of loans. A good mix you have handled different types of loans well.
It is important to know what makes up your credit score. To improve your score don’t borrow too much, and make your payments on time. If possible, you will also want a variety of types of credit and you will want to have a longer credit history.