While most adults know they should maintain a good credit score, many don’t exactly understand the ins and outs about what truly affects that score.
There’s a lot to know, but understanding some of the basics can be a fantastic first start. Here are a few things you should keep in mind if you’d like to get your score in better shape:
There are five separate factors that come into play to determine your overall credit scores:
Payment history: this is how often you’ve paid or missed a payment over time. This accounts for 35% of your score.
Average age of credit accounts: 15% of your score is determined by how long you’ve had credit accounts open. More than 10 years is considered optimum.
Credit utilization: This accounts for 30% of your score, and it considers how much of your credit you’re using compared to what you have available. You should aim for less than 30%. For example, if you have a $20,000 credit limit, you should aim to carry a balance of less than $6,000.
Inquiries: Lenders will often do a hard pull on your reports when you apply for credit, which will result in an inquiry on your credit report. The more you have, the lower your score. However, this only makes up 10% of your overall score.
Account types: It’s good to have a mix of account types on your credit report, such as having credit cards along with installment accounts, including a car loan or mortgage. This is also 10% of your score.
Instead of paying to see your credit report, you should know that you’re legally entitled to a free copy every year from each of the three major credit bureas—Experian, Equifax and TransUnion. You don’t have to check them all at once, so cycling through each of them every four months can keep you informed year-round.
Since having a less than stellar credit report can mean higher interest rates and less-than-great terms on loans and credit cards, having a good score can mean a difference of thousands over time. Taking the time to try raising your score by even 100 points can make a world of difference in money saved.
Keeping an eye on your credit reports can help you spot fraud and put a stop to it more quickly. If you become a victim of identity fraud, it’s better to know as soon as possible so you can take the steps necessary to prevent new accounts from being opened, and more money spent.
If you have a bad credit score, know that there’s a time limit on how long negative information will remain. In other words, while they’ll remain for a while, they aren’t going to haunt you forever—so work on improving what you can for when the negative items do fall off.