Having a good credit score is important because it has a direct impact on whether or not an individual will get approved by lenders for mortgages, car loans and other credit. In addition, having a low credit score can lead to significantly higher interest rates. Understanding the different items that are considered on an overall credit score is an important part of being financially responsible.
Payment History
Payment history accounts for 35 percent of a person's overall credit score, according to MyFico.com. Even making one late payment can lower your credit score significantly. Missing your payment entirely and having your bills sent to a collection agency will hurt your score even more. Setting up payment reminders is one option to avoid late payments. Making payments on time for several months after making a late payment will help bring your score back up.
Amount Owed
The amount of money an individual owes accounts for 30 percent of a person's overall credit score. Credit bureaus look at how much a person owes compared to their total available credit limit. Bankrate.com suggests keeping your total amount owed below 30 percent of your total available credit.
Length of Credit History
The length of a person's credit history accounts for 15 percent of a person's overall credit score. Creditors are more interested in giving a new line of credit to someone with six years of reliable payment history than someone with just six months. Credit bureaus typically look at individual accounts when determining the length of a person's credit history. Accounts that have been open for three years have a bigger impact on a person's credit score than one that's been open for only a few months. However, if the older account was not used consistently, then it will not have as large an impact on a person's credit score as a newly opened account that's used consistently every month. Older accounts that are used consistently have the largest bearing on a person's credit score.
Types of Credit
The types of credit a person uses accounts for 10 percent of a person's overall credit score. The main two types of credit are revolving and installment credit. Installment loans are loans like mortgage and car loans. Credit cards are the best example of revolving credit. Individuals with a mortgage will get a boost to their credit because mortgages are harder to obtain than credit cards. Individuals with a general credit card instead of a store credit card are also looked upon more favorably. When it comes to this credit score factor, having a mix of revolving and installment credit is your best bet.
New Credit
New credit accounts for 10 percent of a person's overall credit score. The term new credit encompasses recently opened accounts and recent credit inquiries. Applying for new lines of credit will temporarily lower your credit score. However, as time passes your score will rise, even if you were turned down for new credit line.
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