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Understanding Credit Scores: Key Factors and How to Improve Them
Credit scoring systems like the FICO® Score and VantageScore® analyze your credit report to predict your likelihood of repaying debts. These systems use advanced algorithms to evaluate your credit history for signs of good or bad credit management habits.
Factors That Determine Credit Scores
1. Payment History: 35%
Making timely debt payments is crucial for your credit scores. A single late payment can significantly harm your scores, while an account sent to collections, foreclosure, or bankruptcy can have even more severe consequences. Payment history accounts for about 35% of your FICO® Score.
2. Amounts Owed: 30%
The total amount you owe and the portion of your available credit in use affect your credit score. Your credit utilization ratio—the percentage of your total borrowing limit you’re using—is a significant factor. Paying off high-balance credit cards can quickly boost your score once reported to the credit bureaus.
Credit Utilization Rate Example
| Credit Limit | Balance | Utilization (Balance/Limit) |
|---|---|---|
| $6,500 | $1,600 | 25% |
| $4,800 | $1,500 | 31% |
| $8,000 | $1,300 | 16% |
| Total: | $19,300 | 23% |
Individuals with the highest credit scores tend to keep their utilization rates below 10%. Utilization rates of 30% or higher can negatively impact scores. Paying down higher balances can lead to quick score improvements.
3. Length of Credit History: 15%
The longer your credit history, the higher your credit score tends to be. The FICO® Score evaluates the age of your oldest and newest credit accounts and the average age of all your accounts. Closing accounts in good standing doesn’t immediately cancel out their ages for calculating credit history length.
4. Credit Mix: 10%
Managing multiple debts and different credit types benefits your credit scores. Credit scoring systems favor a mix of installment debt (like student loans, mortgages, car loans) and revolving accounts (credit cards, lines of credit). Credit mix comprises about 10% of your FICO® Score.
5. New Credit: 10%
New debt increases the odds of falling behind on old debts. Credit scoring systems may slightly lower your score in response to hard inquiries—entries on your credit report when a lender processes a credit application. Hard inquiries for rate shopping on installment loans are considered as one inquiry if made within a short period.
Frequently Asked Questions
How Do I Check My Credit Score?
You can check your credit score through various online services, including free credit monitoring from Experian.
Can Service Accounts Impact My Credit Score?
Yes, service accounts like utilities and phone bills can impact your credit score if reported to credit bureaus.
What Can Hurt Your Credit Scores?
Late payments, high credit utilization, and new credit inquiries can negatively affect your credit scores.
How Can I Improve My Credit Score?
Adopt good credit habits, such as making timely payments and keeping credit utilization low, to improve your credit score over time.
What Can I Do if I Don’t Have a Credit Score?
Start building credit by opening a secured credit card or becoming an authorized user on someone else’s account.
The Bottom Line
Understanding the factors that influence credit scores helps you make informed decisions to improve your scores. While some factors are beyond your control, adopting good credit habits can lead to steady improvement. For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey.
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