What you didn’t know about your credit score and how it’s calculated:
Step One – Where to Start?
If you want to fix your credit, but don’t know where to start – You are not alone. 25% of U.S. adults with a bad or fair credit score don’t know where to start when it comes to fixing their credit and 16% say they have tried to fix/take action but got overwhelmed by the process.* Fixing your credit starts with knowing and understanding the importance of your current credit score and any negative items that are impacting it. Some credit repair companies, like Lexington Law, can provide you with a free credit report summary and consultation to help you better understand the items on your report and get your credit repair process started.
Why Does Your Credit Matter?
Were you ever denied a home loan, unqualified for a new car, or unable to get the interest rate you deserved? Your credit could be holding you back from purchasing that “big ticket” item you’ve been wanting. In fact, over one-quarter of Americans (26%) were unable to purchase the “big ticket items” (e.g., home, car) because of their low credit score.*
What Is Your Credit Score Made Of?
There are 5 factors that affect your credit score. Having the knowledge and understanding behind your credit score can help you achieve the score you want and make better credit decisions for the future.
5 Factors of Your Credit Score
35% Payment History
30% Amount Owed
15% History of Credit
10% New Credit
10% Account Diversity
Payment History – 35%
Lenders need to know how reliable you have been in the past, and your payment history can illustrate this. This covers your payment consistency, collections and charge-offs, and any bankruptcies, tax liens, etc.
Amount Owed – 30%
Contrary to popular belief, debt can be a good thing when utilized correctly in proportion to your overall credit limits. This section covers:
Your total number of active loans (mortgage, student debt, etc.)
Your credit card debt and credit utilization. The healthiest credit scores are born from a utilization ratio of 25% or less. For example, if you have a $10,000 credit limit, your owed balance should never exceed $2,500.
History of Credit – 15%
In addition to reviewing your track record, lenders want to be sure you actually have one. A credit history of seven years or more is ideal when establishing clean credit, so make sure to keep your oldest accounts active.
New Credit – 10%
Every new account will likely depress your scores. Of course, you can’t increase (or even have) a credit score without having a track record to begin with. Just know that, with every new account, your credit score will probably get worse before the longer term scoring benefits are realized. Creditors fear those who appear to depend too much upon acquiring new credit accounts.
Account Diversity – 10%
Smart planning is key in every financial realm, and spreading out your spending is a great way to illustrate this concept. Lenders want to see your experience with numerous credit types. If you only have installment loans, consider opening a bank credit card or another line of credit. Broadening your horizons will demonstrate your flexibility and success with multiple credit forms.
Be Ready When Your Credit Matters
Take the time to fix your credit now to be on the path to reaching your credit goals in the future. Start by obtaining a copy of your credit report to see what items might be affecting your score.
Click to get a Free Credit Report and Credit Consultation (hyperlink to Free Value page) or call 1-855-539-5293 to speak to a credit professional about your credit and how to remove inaccurate items from your report.