Good credit scores are beneficial for securing loans and mortgages with the lowest possible interest rates. This three-digit number reflects your trustworthiness to lenders based on various factors in your history. Since the credit scoring system protects both you and the lender from default risk, improving your credit score is a benefit to you and the lender.
The Largest Components
According to FICO, 35% of your credit is payment history. Therefore, over one-third of your score is simply paying dues and credit card balances every month on time. Potential lenders want assurance they can collect on time.
Additionally, 30% of your score is from balances owed. Using too much available credit communicates to lenders that by accepting another loan, you’re at a higher risk of default. According to LendingTree, utilizing only 1-10% of your credit may help raise your score, and 30% should be the maximum. This practice demonstrates you can manage money and live within your means, as not doing so could prohibit your ability to repay loans.
The Fine Details
15% of your score is determined by the length of your credit history. Other things equal, longer track records better reflect your true creditworthiness than only having a few months. FICO considers your accounts’ ages, including oldest, youngest, and average, and how long ago they’ve been used. Therefore, opening a new account can temporarily lower your score.
Further, 10% of your score is credit mix, demonstrating your history of holding credit cards, retail accounts, installment loans, etc. It helps to have multiple types of credit in your history, but not all types are necessary. Similarly, the last 10% of your score is new credit. Opening multiple new credit lines in a short window of time reflects greater risk.
Finally, limit “hard pulls” to only as necessary. Hard pulls or “hard inquiries” are third-party requests to see details of your credit history, and they stay on your credit report for two years. You’ll encounter these requests when applying for a credit card or seeking financing, such as for a car. They cannot access your information without your consent. “Soft pulls,” such as accessing your own reports or going through pre-approval offers, do not affect your credit score.
The Next Step: Financial Planning
Overall, notice that income is not a consideration in credit scores, as great wealth does not translate to great money management skills. Hence, the crucial factor is discipline, not money. If you are ready to take the next step and build a comprehensive financial plan for long-term goals with Tulsa financial advisors at First State, contact us at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.