Your credit score is calculated in five categories.
Each of these areas is a way to help you raise your credit score, but it's essential to understand how they are weighted and which areas will have the most impact. In these five categories, there are some categories that you can control and others that are not as easy to control.
Payment history and accounts owed make up 65% of your credit score.
These two areas have the most impact. The length of your credit history is 15% of your score. Your credit mix and new credit are both 10%, with a total of 20% of your credit score being impacted by these areas.
The lower percentage areas don't impact your score as much as the other two high-impact areas, but they can help your score go from great to excellent.
The most significant impact category on your credit score is your payment history.
This is the most significant impact on your score because it can tell a lender a lot about your credit habits and how likely you are to pay back your loans.
Paying your account on time will impact your score the most. If you currently have a 100% on-time payment history, lenders will view you as someone who can pay back their debt on time without any delay.
However, lenders will see you as a bigger risk when you begin to not pay your bills on time. Not paying your bills on time impacts your score, and you also have late fees and more interest to pay back.
Once you miss your payments for a certain amount of time, you'll go into delinquent status and be sent to collections.
To have the greatest impact on your score, pay 99-100% of on-time payments.
If you pay 98% of your debts on time, your score will drop. 98% may seem like a good amount of on-time payments, but in the credit world, it is not. Once you hit 97% or less, you'll see a lower credit score. Just missing 3% of your payments will negatively impact your score.
Your payment history is a great place to start if you want to increase your score.
This will ensure you are paying your bills on time and not missing payments. If you have missed any payments, make sure you are also settling those accounts.
Another high-impact area on your credit score is accounts owed, also known as your credit utilization.
This area is a percentage of the total credit limit that you are using. Every month when a new statement comes in, this percentage will be updated to lenders and can impact your credit score.
To find out your total credit limit, find the total credit limit you have on your credit cards and loans.
For example, if you have three credit cards with a maximum credit limit of $7,000 on each card, your total credit limit is $21,000.
To have a good score in this area, you want to only use 0-9% of your overall credit limit. When you start getting to 30-50% of your credit limit being used, this is where you'll see a decline in your score. Utilizing 75% of your overall credit limit will negatively impact your score.
You may have heard the advice to carry a small balance to keep your score high. This advice is not wrong, but it's not right. Using 0-9% of your credit limit will help to increase your score. If you never carry a balance and your utilization percent is 0%, you'll still be able to have a good score.
However, it's risky keeping a balance because you will earn interest on that and could forget about it.
To increase your score in this area, keep your balances low and don't use up all of your available credit.
It shows lenders that you are not overextended and will have a higher likelihood of paying your monthly payments.
Understanding how credit scores are calculated will give you the knowledge on how to raise your credit score.
Credit scores are important because they allow us to take out loans for a car or house. In addition, online payments and a low credit utilization percentage are two ways to increase your score.
Both areas have the largest impact on your credit score, with 65% of your credit score being calculated from these areas.
If you do not pay your accounts on time or completely miss payments, you'll have a low credit score. Even missing one payment can impact your score. Start paying your bills on time. If you can, set up automatic payments, so you are never late on paying your debt.
If you have a large amount on your credit cards and max out them, you'll also experience a lower credit score.
A lower percentage of your overall credit limit will help you increase your score. Start by paying back any large debt you have. Once you've reached a low utilization percentage, keep it low. Ideally, don't carry a balance each month.
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