Here are the 5 Key Factors that Decide YOUR Credit Score

Over the last few decades, the elusive Credit Score has become one of the most talked-about and worried-about financial metrics in our everyday lives. For most people, it’s become an elusive and vital metric—one that you will often pay good money just to catch a glimpse at.

In reality, your credit score is simply an indicator of your ability to pay back your loans in a timely manner. Lenders are in the business of risk management, so an indicator measuring the risk of lending money to a certain individual is an extremely useful tool. The score itself is a number ranging from 300 to 850, with the majority of Americans scoring between 600 and 800. It’s calculated by measuring 5 key aspects of your credit history.

1. Your bill-paying habits (35%)

The most important part of your Credit Score comes from your payment history, with your recent payments holding greater importance than older ones.

If you rarely miss a payment, you’re in good shape. If you make a habit of paying your bills late, you’re in not-so-good shape. If you’ve left bills unpaid and had collection agencies track you down, you’re in bad shape. If you’ve gone bankrupt and defaulted on creditors in the past, you’re in terrible shape.

1. Your Current Debt & Available Credit (30%)

The less you currently owe the better. Lenders will be wary of lending to someone that already has several other debts that they are obligated to repay. Similarly, the total amount of available credit at your disposal will bring down your credit score.

When people have available credit, they tend to use it, so someone with 5 credit cards with a $10,000 limit on each could be months away from being $50,000 in debt.

1. Your Credit History’s Length (15%)

This one is pretty straightforward; the longer you’ve had credit, the more points you’ll score in this category. This is why it’s a good idea to start your children out with credit cards at a young age, teaching them to use them responsibly and pay their bills on time.

1. Types of Credit (10%)

   There are two main types of credit: Revolving credit (credit cards) and installment credit (mortgages, car loans, bank loans, etc.) Having a good mix of both types of credit will enhance your credit score, as it demonstrates your ability to manage money responsibly regardless of the payment terms.

1. Applying for New Credit (10%)

If you’re applying for new credit cards like they’re going extinct, your credit score will suffer. As long as you don’t have a history of late payments or several payments sent to collection agencies, this shouldn’t hurt you too much. If you do, however, this can be a major red flag as people tend to apply for several cards to sustain themselves just before they go bankrupt.

You might be Surprised to Hear what doesn’t Impact Your Credit Score

Many factors that you might think would be an important consideration when lending someone money – such as your age, income, education, and length of employment at your job – actually aren’t considered in the calculation of your Credit Score. Race, sex, marital status, and whether you own or rent your home are also irrelevant when it comes to the calculation of your credit score.

Paying your bills on time and keeping your overall debt to a minimum are by far the two most important things you can do to maintain a high credit score. If you can demonstrate your ability to pay on time over several years and build up a solid credit history, your credit score should be in excellent shape.

A good credit score will afford you with several financial options that would not have been available to you otherwise, ensuring that you are in the best position possible when making decisions that will affect your future for years to come.

About The Author:

Based in Miami, FL, Houses.com provides the world’s largest online marketplace for homes and real estate. Showcasing over 4 million listings for sale, rent & vacation in over 70 countries, Houses.com is dedicated to helping buyers and sellers turn their House into a new Home.