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Your credit score plays an important role in your financial situation. It can affect your ability to get credit cards, rent an apartment, qualify for a mortgage, or even find a job. Your FICO score is made up of five different factors: payment history, amount of debt, length of credit history, new credit accounts, and types of credit used.
In this 2nd article in our series on credit repair, we will discuss each of these factors in detail and explain how you can improve your credit score!
What is a credit score?
Your credit score is a three-digit number that reflects your creditworthiness. It’s based on information in your credit report, which is a record of your borrowing and repayment history. Lenders use your credit score to decide whether to lend you money and at what interest rate.
Factors That Influence Your FICO Score
FICO scores are determined on the following five factors:
Factor #1: Payment History
Payment history is at the top of the list for a reason. This is the most important factor that determines FICO scores. It represents 35% of your credit score and includes all of your credit accounts, whether you paid on time or not. Late payments can stay on your credit report for up to seven years!
If you’ve missed a few payments in the past, don’t worry! You can always improve your score by catching up on your payments and maintaining a good payment history in the future.
Factor #2: Amount of Debt
The amount of your debt also plays a big role in how low or high your FICO score is. It represents 30% of your credit score and includes both your total credit limit and the amount you owe on your credit cards.
If you have a lot of debt, try to pay it off as quickly as possible. You should also avoid opening new credit card accounts if you’re having trouble making payments on your current accounts.
Factor #3: Length of Credit History
Next is the length of your credit history. It represents 15% of your FICO score and includes the age of all your credit accounts and how often you used them.
You can improve your score by keeping an old credit account and using it frequently. Just be sure to pay the full balance each month. You can also establish a good credit history by opening new accounts and using them responsibly.
Factor #4: New Credit Accounts
The fourth most important factor in your FICO score is new credit accounts. It represents ten percent of your score and includes the number of new credit accounts you have opened recently.
If you’re considering opening a new credit account, be sure to do so responsibly. Don’t ask for too many cards at once and make sure you can afford to pay off the debt.
Fifth factor: Types of credit used
The fifth most important factor in your FICO score is the type of credit used. It represents ten percent of your score and includes both installment loans and revolving lines of credit.
You can improve your score by using a variety of different types of credit products. This shows lenders that you can manage different types of debt responsibly.
The two types of debt that affect FICO scores
In general, credit files contain two types of debt: installment credit and revolving credit.
Installment debt is a loan that you repay in fixed monthly installments over a predetermined period of time. An example of an installment loan would be a car loan or a mortgage.
Revolving credit is a line of credit that allows you to borrow up to a certain limit and then pay off the balance over time. Credit cards are the most common type of revolving credit.
Types of accounts that affect credit scores
There are five types of credit accounts that can affect your FICO score:
- Credit card
- Student loans
- Car loans
- Personal loans
A credit card is a type of revolving line of credit. It lets you borrow money up to your limit, and you have to pay it back every month. Credit cards are considered high-risk loans, so they usually have a higher interest rate than other types of loans.
A mortgage is a type of installment loan. It is a loan used to purchase a house or property. Mortgages generally have a lower interest rate than other types of loans and longer repayment terms.
A student loan is a type of installment loan. This is a loan used to pay educational costs, such as tuition and books. Student loans generally have a lower interest rate than other types of loans and longer repayment terms.
A car loan is a type of installment loan. This is a loan used to purchase a car or vehicle. Car loans generally have a lower interest rate than other types of loans and repayment terms are shorter.
A personal loan is a type of unsecured loan. It is a loan that does not require any collateral, such as a house or a car. Personal loans generally have a higher interest rate than other types of loans and repayment terms are shorter.
What can damage your FICO score?
There are several things that can damage your FICO score. Let’s discuss each below.
- Missed Payments – Missed payments are one of the biggest things that can hurt your credit score. If you miss a payment on a loan or credit card, it will negatively affect your score.
- High Debt Levels – Another thing that can hurt your credit score is high debt levels. If you have too much debt relative to your available credit, it will lower your score.
- Too Many New Accounts – Another thing that can hurt your score is opening too many new accounts in a short time. This tricks lenders into believing that you are in desperate need of credit and may be a riskier borrower.
- Credit Usage – The fifth thing that affects your FICO score is the amount of available credit you use. If you use a lot of your available credit, it will lower your credit score.
- Default Accounts – If you have an account in default, it will hurt your credit score. A default account is an account where you have not made a payment for at least 90 days. Examples of these are foreclosure, bankruptcy, repossession, write-offs and settled accounts.
How to improve your credit score
There are five ways to improve your credit score:
- Pay your bills on time – The easiest way to improve your credit score is to simply pay your bills on time. This shows lenders that you are responsible and that you can manage your debts responsibly.
- Keep your debt level low – Another easy way to improve your score is to keep your debt level low. Try not to borrow more money than you can afford to pay back each month.
- Don’t open too many new accounts at once – Another thing you can do to improve your score is don’t open too many new accounts at once. Lenders may see this as a sign of financial instability.
- Use less of your available credit – The fourth thing you can do to improve your score is to use less of your available credit. Try not to use more than 30% of your total limit, and even less if you can.
- Have a good credit history – The fifth and final way to improve your score is to have a good credit history. This means always paying your bills on time and not borrowing more money than you can afford to repay.
- Pay any outstanding balance – Another way to improve your credit score is to pay any outstanding balance. This will show lenders that you are serious about improving your credit and are ready to act.
- Dispute errors on your credit report – Finally, if you think there are errors on your credit report, you can dispute them. This will help improve your score because it shows lenders that you are taking steps to improve your credit.
This webinar provides a more in-depth look at credit repair than we have time to cover today, so you might want to check it out for a little more information on specific steps you can take yourself. same :
Your FICO credit score reflects your overall risk as a borrower. Lenders consider all five factors when making their decision, so it’s important to understand them all! This makes credit score checking an important task that you as a borrower should pay attention to. By understanding how your score is calculated, you can take steps to achieve a good credit score and make your life easier financially. Thanks for reading and stay tuned for future articles in our credit repair series!