A credit score is a history of your financial activity, not a progress report of recent spending or a snapshot of your last bill payments. There are many factors considered when establishing your credit score. For this reason, it is difficult to grow your score quickly, or at least as quickly as many consumers believe is possible.
But by understanding what your credit score consists of, the ways to improve it, and factors that bring it down, you will be better armed to navigate your way through the credit market and build your score over time.
"Your credit score is an overall history of your financial habits, not a progress report of recent spending."
What a credit score consists of
A credit score takes into account your past finances, as well as current finances.
- Your payment history is a big factor, comprising the largest percentage of your score. If you have consistently paid bills late, this will be detrimental to your score.
- Another factor in determining your score is how much you currently owe. This is considered based on available credit you have as well. But in short, the less you owe against your line of credit, the better off you are.
- The length of your credit history doesn't have as much weight as the first two factors, but it still affects your score. If you have been using credit for a long time, then you are better off, as long as your payments have been made on time. If you have a short history of credit, it doesn't mean you are in a bad spot, just that there is less for a lender to base a decision on.
- Another consideration for your credit score is how much new credit you are using. Have you opened a bunch of new accounts? These can include anything from a new credit card to secure airline miles or a charge card at your favorite store. Having these is certainly not harmful, but accruing too many in a short period of time is not helpful and makes you look needy, which could deter lenders.
- The final factor is the type of credit you are using. Is it a mortgage? Is it high credit card debt? Again, this doesn't matter as much as history or how much you owe, but how you spend your money is considered. Is your credit consistent, or does it spike frequently?
These are the factors that make up your credit score. And while you may have been aware of them, sometimes breaking it down for a closer look can be beneficial.
Misconceptions about credit scores
There are many misconceptions regarding credit scores as well, highlighted by Time magazine. For example, many people are under the impression that their salary plays a role in setting their score. In fact, this is not the case at all. Likewise, it doesn't matter if you have a job at all. As long as your spending and credit are stable, then your lack of work won't affect your score.
Another common misconception is that there is only one credit score. To many people, this score is provided by FICO. According to Forbes, there are many types of credit scores generated by the credit bureaus, and they are unique to various industries such as mortgage lenders or insurance providers.
According to Main Street, closing old credit cards will not boost your credit score, as some people believe. In fact, doing so could hurt your score. Remember, your score takes history into account, so when you close older cards you shorten that history, which means there is less to base your score on. Even if you don't use those old cards, don't cancel them – let their empty balance work for your credit score.
It is not uncommon for consumers to have some confusion regarding credit scores. But don't let misconceptions prevent you from building your score. At the end of the day, make your payments on time and don't borrow more than you need. Even if you have additional questions about your score, well-balanced financial habits will continuously work in your favor.