Your credit score could be the single most important number in your life. Your credit score will have an impact on most parts of your life, including, but not limited to, where you live, where you work, and what you drive. Improving your score and preventing it from going down is an ongoing effort, but there are various items that have a large impact on your credit score. Below are some of the items and what they mean.
- Credit Utilization – This is the amount of credit you have used compared to what is available. It is listed as a percentage, and it is important you use less than 30% of the credit available. Once you start going over 30%, your score will be negatively affected. Credit utilization is the biggest factor when determining your credit score.
- Payment history – Are you making payments on time every month? The answer should always be yes. Do whatever you have to, pay on time. Set alerts for yourself to make a payment, change the due date of your payment (this is not available for all creditors), or set up auto-pay so you don’t risk forgetting a payment. This is the second largest factor when determining your score.
- Age of credit lines – How old you’re various credit accounts also affect your credit score. The older the credit account, the better. If you numerous accounts open and you are looking to close one that you don’t use anymore, make sure you close the account that was opened most recently. You want to keep the old accounts open.
- The number of accounts – The number of accounts you have also impact your credit score. Both open and closed accounts are used. Generally speaking, the more accounts you have, the better your credit will be.
- Types of credit – Similar to the number of accounts, the types of credit you have open also as an impact on your score. It is important to have more than just credit cards open. Mortgages and car loans are typical types of credit to have in addition to credit cards. Some utility companies report to credit agencies, so contact your local utility company to find out.
- Credit Inquiries – The number of credit inquiries will have a negative effect on your credit score if you have too many. A hard credit inquiry will be run when you apply for a credit card or apply for any type of loan, including a mortgage. These will fall off after a period of time, but try to keep these inquiries to a minimum.
There are a few things that will have a very bad influence on your credit score, however.
- Bankruptcy – Essentially, bankruptcy is when you are no longer able to pay for your outstanding debt. You go to court and the judge along with a trustee will examine your debt and financial situation to see if you, in fact, cannot pay your debts. If they determine that you can’t, they will wipe it out, but your score will reflect poorly as a result.
- Charge-off or loan default – These are similar, but both are awful things to have on your credit history. A charge off is when the credit company thinks you will not pay your debt back and charge off your account as a result. Defaulting on a long is essentially the same thing. The lender thinks you won’t be able to pay your loan back and pay it off, with negative consequences to your credit.
As I said, your credit score is one of the most important numbers you are responsible for. Having a good credit score can present you with more opportunities. Having a poor score, however, can close some doors for you. You could be turned down for a mortgage or even a job. You need to do whatever you can to establish or improve your credit habits. To learn more about credit and credit scores, visit www.nerdwallet.com.