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The Big Five That Make Up Your Credit Score

July 4, 2017

Your credit score is the single most important number in your personal finance. Your score is what creditors use to determine whether you are approved for a loan or a credit card, and if so, what your interest rate will be. Insurance companies take it into factor to determine your rates. More and more organizations are taking your credit score into account when deciding to do business with you. Employers may even take a look at your credit report to before hiring or promoting.  

How is your credit score calculated?

Payment history (35%) is your overall record of paying bills and loans on time. Fewer late payments you have, the better your score will be.

Credit utilization (30%) is the ratio between your current balance and the maximum amount you can owe. The smaller the ratio, meaning the less debt compared to your total limit, the higher your score.

Credit age (15%) is the average period you’ve had your credit cards or other loan accounts. The older your credit age is as a whole, the more credibility you have, and higher the credit score.

Types of credit (10%) are what kinds of credit lines you own, from credit cards to student loans to mortgages. Typically, it’s better to have various types of credit as long as you’re paying all of them on time.

New credit (10%) is how recently you’ve opened a new account. New accounts can bring down your score because it looks like you’re in need of credit. Inquiries, which are background checks on your credit made by banks and loan lenders, also bring down your score for the same reason.

Knowing how to improve your score

This is the basic run-down of the five pillars that hold up your credit score or bring it down. But just glossing them over isn’t enough—each component affects your credit score in a unique way, so it’s important to delve into details.

Lucky for you, we have a series of articles covering the essentials. Go to the links below, and you'll come out with a solid understanding of how to keep up your score.