Getting your money under control will have many benefits. One is an improved credit score. So how is a credit score comprised? A credit score is a three-digit number that estimates how likely you are to repay borrowed money and pay bills. It is based on information in your credit report. Credit scores range from 300 to 850, and the higher your score, the better the possibility of qualifying for credit products with favorable interest rates and terms.
There are five main credit score components to consider, each of which contributes to your overall credit score. Let’s dive in and understand each factor.
- Payment History: 35% This component looks at whether you have a history of paying your bills on time. Late payments can negatively impact your credit score, while a consistent record of on-time payments can help improve it.
- Amounts Owed: 30% This factor considers the amount of debt you have compared to your credit limits. A high debt-to-credit ratio can lower your score, so it’s important to keep your balances low.
- Length of Credit History: 15% This component looks at the age of your credit accounts. The longer your credit history, the better your score.
- New Credit: 10% This factor looks at how often you apply for new credit and open new accounts. Too many new accounts in a short period of time can negatively impact your score.
- Credit Mix: 10% This component looks at the types of credit accounts you have, such as credit cards, mortgages, and car loans. A healthy mix of different types of credit can help improve your score.
It’s important to keep these components in mind when managing your credit and working to improve your score. As you can see that 65% of your score has to do with paying debt on time and getting the balances at zero or very near zero.
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