For too many people, credit score is some arbitrary number that exists somewhere out in the cosmos and comes down from time to time to affect their ability to get a loan. In fact, your credit score is a derived formula from a number of different credit factors, and knowing where the number comes from is a great step toward recognizing both the importance of keeping a good credit score and the very real nature of the benefits a high score offers. Keeping a credit score high is like a self-fulfilling prophecy, because in order to keep your score high, you must enact some very useful debt management strategies.
Credit Score Breakdown
A typical computation of credit score is as follows:
- 35% payment history. Payment history means just that: if you make loan payments on time, this portion looks good. If you have missed payments, it negatively affects this portion.
- 30% debt. Your debt-to-credit ratio is considered here, so the higher your levels of debt, the lower this score will be. Different types of debt are considered differently. Credit card debt has the highest negative impact.
- 15% length of credit. The longer you have had credit open, the logic goes, the longer you have been making regular payments to that loan, and therefore the more trustworthy you are as a borrower.
- 10% types of credit. Having different types of debts actually increases your score here, as it shows an ability to manage diverse types of debt.
- 10% credit inquiries. Seeking new lines of credit makes lenders wary that you are in financial trouble and needing new ways to make payments. Keep your inquiries to a minimum, and don’t apply for every credit card every department store offers.
Knowing what goes into your credit score can go a long way to helping you understand how to keep it high.