Your credit score is calculated in five areas - payment history, accounts owed, credit history, credit mix, and new credit.
Each of these areas are weighted differently. For example, 65% of your credit calculation comes from payment history and accounts owed.
Therefore, these are two areas where you can make a significant impact on increasing your credit score.
Credit history, credit mix, and new credit only make up 35% of your credit score and will have a lower impact on your overall score.
However, these three areas can still help you increase your score in the long run. In addition, they can help make your score go from great to excellent.
Credit history, or age, has a medium impact on your overall credit, impacting 15% of your overall score.
This area is essential for a lender because it gives them an idea of how much experience you have using credit. Your credit age is an average of all of the accounts you have open.
If you are a new borrower with good habits, that can be a good indicator that you are a responsible borrower, but it can also mean that you have only a few years of experience, and adding more credit could be too much for you as well.
If your credit history is less than two years old, this will slightly decrease your credit score. However, it won't make you have terrible credit, especially if you have a higher score in on-time payments and credit utilization.
If your score is older than seven years, you'll have the highest possible score in this area.
It would be best to let your credit age like a fine wine. Don't close any accounts, keep them active in good standing, and let time be on your side.
As each year goes by, your overall credit history will improve; this is where you'll see your score go from great to excellent.
Credit mix has a low impact on your credit score.
It only accounts for 10% of your score. While this is a low-impact area, don't forget to focus on it. Credit mix is the number of existing accounts and the type of accounts. Lenders want to see that you have a different variety of accounts opened to see if you are responsible.
If you have 0-5 accounts opened, you'll have a lower score in this area. Once you get to 11 and more, you'll have a higher score in this area. Because this account is low impact, I would not focus on getting to 11 accounts right away because that can also negatively impact your score.
As you go through life, you'll slowly start opening up different accounts from credit cards, car loans, mortgages, etc.
This category is similar to credit history, keep up the good habits of paying accounts on time and not carrying a balance, and this part of your score will slowly increase.
Closing accounts can slightly decrease your score, but because this is a low-impact area, it won't impact it much. Many people are surprised when they close an account that their score gives down. It will go back up as you continue to use your other accounts.
The last low-impact area on your credit score is new credit.
This accounts for 10% of your overall credit score. New credit is also a hard inquiry. Hard inquiries occur when you apply for a new account. Anytime you apply for an account, your score is pulled for the lenders to see what your score is. This pull stays on your score for two years.
If you have had 0 to 2 inquiries on your report, your score won't be impacted in this area.
However, when you start getting to 5 or more inquiries in two years, your score will slightly decrease in this area. Applying to credit accounts is inevitable, so don't avoid opening accounts, but don't apply to accounts just to apply, especially if you get rejected.
Even if you get rejected, this inquiry will show up on your score.
Two of the easiest ways to boost your credit score are making on-time payments and not using up all your credit limits.
These are two things you can start today and begin to see improvements within months.
The long game focuses on credit history, mix, and new credit. This is a slower strategy, but with thoughtful planning and considerations, these areas can help take your score from great to excellent.
Time is the most significant factor for these three areas, which is why they impact your score more slowly. As you begin working on your credit score, your age of credit will increase.
Then, as you go through life, you'll naturally have to open up more accounts which will diversify your credit mix and the total number of accounts you have. Finally, as you take out new cards, let those hard inquiries drop off after two years to improve your score.
Understanding credit and what makes up a credit score is essential to determining how to increase your credit score.
There are obvious ways that you can increase your score with good financial habits. Starting as soon as possible to work on your credit score will also help you, but be cautious not to open up accounts if you are not ready to build your credit score.
It is very easy to mess up your credit score; it just takes a few minor mistakes that will take years to fix.
February 1, 2023
January 31, 2023
January 28, 2023