Your credit score plays a huge role in what the interest rate and credit line that a bank will offer you. Most people seem to understand that if you do not pay your bills, then your credit score will not be high.
A lot of people, however, seem to have questions about what else is factored into your credit score as well as how to improve their current credit score.
What factors are used to determine your credit score?
Each company that issues a credit score does things a little differently, but for the most part they take the same things into consideration. There are five main factors that will influence your credit score:
- Your payment history
Credit reporting companies will take a look at your payment history. This will include how many times you paid a bill late as well as whether or not you paid the full amount owed or the minimum amount owed. In order to receive the highest credit score, you should make sure to pay your bills in full and on time.
- The amount of money you owe
Credit reports will consider the amount of debt you have. If you owe an excessive amount of money, then there is a smaller chance that you will be able to pay your credit card bills. This means that you are a higher risk, and therefore, a bank will probably offer you higher interest rates and a smaller credit line because it is unsure that you will be able to pay back the money that you borrow.
- The length of your credit history
You are much more likely to forget to pay a bill or to spend too much money on credit when you have not had a credit card for very long. This is simply because when you have not been handling credit, you are less familiar with how credit cards work and the consequences associated with using them incorrectly.
- The amount of new credit you have
If you have recently applied for a lot of new accounts, then that means that you are more likely to be a “credit risk.” Opening a lot of credit accounts is a sign of financial struggle because a lot of people who are struggling financially choose to go into credit card debt. Unfortunately, these people are often times unable to ever pay off the debt that they accrue.
- The types of credit used
Credit reporting companies like to see a mix of different types of credit. These types of credit can include credit cards issued by banks, store credit cards, and installment loans for car payments or mortgages. Measuring your mix of types of credit used is similar to how college admissions counselors look at how well rounded you are.
This factor plays a minor role in determining your overall credit score; so do not be too concerned if you do not have a perfect mix of credit.