Your credit score is a very cryptic but important thing. From buying a house to obtaining a job, your credit score can play a role in how well these events turn out. In this post, I will describe the various factors that factor into your credit score, with upcoming articles that focus on how to improve in these areas. Feel free to voice in the comments your tips or questions!
Credit Card Utilization – Lower is better
This is one of the most confusing aspects of your credit score. Utilization is how much of your credit you are using when it is reported to the bureaus. Most often, this occurs a few days before of after your billing date. A good utilization is generally in the 1-20% range. Some people interpret this to mean that you should carry a balance month to month. This is not the case, as the your balance is reported, and you can simply pay before the payment date with no interest incurred. By utilizing a small percentage of your credit at any given time, it lets potential loaners know that you can effectively use the credit that has been given to you within a set limit.
Payment History – Regular, on-time payment is preferred
One of the most important aspects of your score is your payment history, which is what it sounds, the actual payments that have been made on your debt accounts. An effective payment history is one that has established on time payments over a variety of accounts.
Age of Credit History – Older is better
This factor is most often out of your control, as there are few things that can improve this category other than simply the time that your accounts have been open. Overall, this category is the average amount of time it has been since you opened your credit cards. This is important to the bureaus because it tells them that you have maintained credit lines for a set amount of time and negates the risk that your are opening and closing lines recklessly.
Total Accounts – Higher number is better
This category of your score is based on the number of debt accounts that you have open across a variety of institutions, including credit cards, car loans, and mortgages. Institutions often like to see a larger amount of accounts as it indicates that your debt is established across a variety of uses, and also indicates that you are responsible in handling different instances of debt.
Credit Inquiries – Lower is better
When you apply for a credit card of other type of lending instrument, there is what is called a “hard pull”, which means that the institution is obtaining your credit score. These hard pulls are accumulated and factor into your score. A lower amount is preferable as it indicates to a lender that you are applying for credit in a responsible manner and not abusing the lending process.
Derogatory Marks – Lower is better
This is a more obvious category but should not be taken lightly. Derogatory marks on your credit appear as a result of collections, bankruptcies, civil judgments, and liens and can potentially harm your score for years if they occur.
Overall, some of the categories may seem somewhat counter intuitive when it comes to evaluation of your score, but when you think about it from a lenders perspective, a large number of accounts that have had regular, on-time use and payment is what they are looking for.