June 29, 2017
Your credit score is one of your most closely-guarded metrics. It says as much about you as it does about your personal finances. A good credit score indicates that you can manage your money well. This is also reflective of a specific personality type: disciplined, reliable, and responsible.
Sometimes, things don’t run smoothly. Work is unpredictable, the economy is volatile and personal circumstances may change. As a result, your credit score may take a hit. If this occurs, it’s important to remember that relief is at hand. There are many workable solutions you can employ to repair your credit, and return dignity to your profile. Before you begin work on improving your credit score, you need to know what it is. It’s equally essential to understand each of the core components of your credit score.
What makes up a credit score?
A credit score is comprised of five major components. These are each weighted differently, depending on their importance in the overall credit score. Typically, a FICO score is made up of the following components from least important to most important:
- The Amount of New Credit Issued to You – 10 percent of your credit score;
- Different Types of Credit That You’re Using – 10 percent of your credit score;
- How Long Have Your Accounts Been Open? – 15 percent of your credit score;
- How Much Money Is Owing? – 30 percent of your credit score;
- What Is Your Payment History like? – 35 percent of your credit score.
As you can see, the most important determinants of your credit score are point No. 4 and No. 5. There are three major credit reporting agencies in the United States. These include TransUnion, Equifax, and Experian. These agencies provide one free credit report to individuals every year. Before you set about improving your credit score, it’s important to request a credit report from one of these agencies.
Up until 2009, all three credit reporting agencies had an agreement with myFICO, but Experian terminated its contract in 2009. FICO scores run from 300 on the low end to 850 on the high-end. A higher number is preferred, since it qualifies the user for better terms. Currently, 90 percent of U.S. financial institutions utilize FICO scores to make decisions on credit approvals/denials.
What can you do?
- The first thing that you can do about improving your credit score is pay down your credit card balances. If you are running small balances on multiple cards, pay them off. The algorithm that determines credit scores also tracks how many cards have balances on them. If you charge multiple small amounts to several cards, instead of one bigger amount to one card, you may hurt your credit score. The more balances you are running, the worse off you are.
- Keep a close eye on your existing credit card balances. What is your credit utilization figure? This measures the amount of credit you have used versus the amount of credit you have. The more credit you have available, the better off your credit score will be. Anything less than 30 percent is advised. One way to reduce your monthly utilization ratio is to make more frequent payments during the month.
- Make sure that you pay your bills on time, every time. Late payments are a bugbear to your credit score. They will hurt your credit score in a big way. Remember that timely payments comprise 35 percent of the credit score. Many folks forgo monthly payments while they’re busy saving up for big-ticket purchases. This practice should be avoided at all costs.
- Plan for your credit applications. Every time you apply for credit, your credit score takes a hit. The reasoning behind this is simple: lenders will know that you’re seeking to use more credit. Fortunately, the credit scoring algorithms that are in use do not penalize you for making multiple mortgage loan inquiries, auto loan inquiries or student loan inquiries within a 30-day period.
- Stay abreast of your credit reports and your credit score as often as possible. This does not mean that you should obsess about these numbers, but you want to be sure that no fraudulent activity is taking place, and that lenders are seeing an accurate representation of your credit history.
Sheza Gary has been a project strategist since 2009 and has been involved in the launching of startups and tech companies in New York for more than five years. She has keen interest in writing her own experiences about business plans and upcoming business supporting technologies. She loves public speaking.