Do you just take your credit score as it comes, not really understanding why the rating is poor, fair, good or excellent? If you’re trying to improve your credit, the way to get there is to first understand the factors that could be preventing your score from going up. Then you can focus on working on whatever is holding you back.
If you currently have a high credit score, you’re already doing many things right when it comes to having good credit. However, that doesn’t mean you don’t need to pay attention to what’s going on with your credit and how it affects your credit score so you can hang onto that good score.
The factors that determine your credit score are fairly straightforward and easy to investigate on your own so you can make necessary changes. But first, you must know where you stand on the scale of poor to excellent credit. Credit score ranges vary slightly, depending on which credit score model is used, but here are the general ranges, according to major credit bureau Equifax:
- Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
If you’re near the bottom of that range, don’t be discouraged. The good thing about your credit score is that you can always improve it. Even something as simple as the passing of time can work in your favor. Ready to start fine-tuning your credit situation to improve your credit score or maintain the excellent score you already have?
Here’s what you need to know about the three major factors that make up your credit score.
1. Payment history
We all know that paying bills on time is important, but did you know that payment history is the most significant factor in determining your credit score? Payment history accounts for around 35 percent of your credit score. If your score is low, you’ve probably got past-due or collections accounts appearing on your credit report.
The good news is that account payment history won’t stain your credit report forever. Negative payment history automatically drops off your credit report after seven years. So, if a collection agency account showed up on your credit report six years ago, it will be gone in a year. And an account that’s been hurting your credit for five years will drop off after a couple more years.
Even bankruptcy doesn’t haunt you forever. Depending on which type of bankruptcy filed, bankruptcy automatically drops from your credit report seven to ten years after you filed.
Those drop-off dates will be here before you know it. Meanwhile, make a point of paying all your bills on time so you can build a positive payment history. That way, when those negative accounts drop off, your credit score should improve little by little.
Find out: How is a Credit Score Calculated?
2. Credit utilization rate
The next major factor in your credit score is your credit utilization rate. That’s the percentage of your revolving debt to available credit. The credit utilization rate makes up about 30 percent of your credit score calculation. For example, if your available credit is $10,000, and your credit card debt is $5,000, your credit utilization ratio is 50 percent.
Ideally, you should keep your credit utilization rate below 30 percent for a higher credit score. So, if your available credit is $10,000, you’d want to keep your credit card debt below $3,000. Better yet, lower your credit utilization rate by paying off the balance or chipping away at it month by month.
3. Length of credit history
Thinking of canceling those old credit cards you never use? Don’t be too quick to run those cards through the shredder. Older credit accounts on your credit report are good for your credit score. That’s because the length of credit history on your credit report comprises around 15 percent of your total credit score.
There are other parts of your credit that determine your credit score, too. Having a credit mix of credit cards and loans accounts for around 10 percent of your score. New credit accounts comprise about 10 percent and can lower your credit score by a few points temporarily. That’s because new accounts represent a greater credit risk, especially if you don’t have a long credit history.
How to make your new knowledge work for you
Now that you know how your credit score is determined, you can work on improving the areas that keep your score lower than you prefer. Start by ordering a free copy of your credit report from AnnualCreditReport.com. Then review the report to see where you stand and what you need to improve.
Meanwhile, make all payments on time and keep your credit card balances low or at zero. Eventually, your diligence should pay off with a higher credit score.