Whether you’re in the market for a new car or switching careers, your credit score will follow you throughout many major events in your life. Your credit score is often considered your reputation as a borrower, and is typically reviewed by anyone who is considering loaning you money or something of value.
An easy way to build your credit is to understand how your credit score is calculated in the first place. We’ll walk you through the five factors that contribute to your score, and how you can set yourself up for financial success.
Payment History
The best way to boost your credit is to pay your bills on time every time. While this tip may seem straightforward, your payment history makes up 35% of your overall score and helps you establish a strong track record that will make creditors more likely to lend to you. Your credit card and loan payments are reported to the credit bureaus every pay cycle, but it is also important to make timely payments on rent, utilities and other bills as well. Although your landlord does not report those on-time payments to the credit bureaus, not making a payment can be reported to these agencies and affect your score negatively. If you are unable to make your payments, talk to your creditors and see if you can work out an agreement in writing, rather than waiting for the problem to go away.
Amount Owed
Another component of your credit score is the amount of debt owed, so it is important not to max out your available credit. When you use your cards to their full limit, for example, it demonstrates to creditors that you may have a harder time making your payments and that you are a high risk borrower. By reducing debt, you can significantly improve your credit score over time. The amount of debt owed makes up 30% of your score.
Length of Credit History
Your length of credit history plays a role in your overall credit score (15%, to be exact), so it is often helpful to keep your oldest card open as long as you are not being charged an annual fee.
Types of Credit
Diversifying your credit portfolio is a helpful way to build credit over time, and makes up 10% of your score. If you have a mix of revolving credit (such as credit cards) and installment loans, this demonstrates to creditors that you can effectively manage different types of credit and will make them more likely to lend to you.
New Credit
You should avoid applying for new credit too often, because it can lower your score and indicate that you are a higher risk as a borrower. If a creditor sees too many inquiries on your report, they may fear that you are overextended and unable to make payments. Although it may be tempting, avoid opening store cards from your favorite retailers unless you are absolutely in the market for a new card and have done your homework. The interest rates tend to be higher on these cards and are often not worth opening. New credit makes up 10% of your score.
If you are ever in doubt, you can always check your own credit report to verify what is on it and to protect yourself from identity theft and fraud. You can request a free copy of your credit report from all three credit bureaus at AnnualCreditReport.com once a week through April 2021.
To learn more about credit cards available at Addition Financial, click here. For more helpful resources, webinars, and other online tools, visit Addition Financial’s blog.
Valerie Moses is a Senior Relationship Manager at Addition Financial Credit Union, where she manages public relations and various Central Florida partnerships. When she is not at a community event or cheering on the UCF Knights, she can be found at her lifestyle and travel blog, Wellness & Wanderlust.
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