The three digits that represent your score can effectively dictate our lives in North America, from rental applications, to car loans and mortgages, the strength of those three digits can save you tens, or hundreds of thousands over your life.
Under Equifax ratings, there are 4 credit ratings:
Poor: 300–659
Good: 660–724
Very Good: 725–759
Excellent: 760–900
Five metrics that are used to calculate your credit score: Payment History, Utilization, Average Age of Accounts, Credit Mix and Hard Inquiries. We’ll dive into each of these in this article, and also explain how you can improve your score in the long run.
Payment History (35%)
Payment history is a pretty simple one; it shows how responsible you’ve been with the credit lines you hold. If you pay your credit cards, mortgages and car loans on time, you’ll build payment history. The more consistent you are with regular, on-time payments, the more your credit score will increase.
An important note is that it’s much easier to decrease your score, than it is to improve it. Therefore, a takeaway from this section is to always pay your bills on time! Or, do not overspend on your credit cards, treat your credit card like a debit card to ensure you never fall behind on payments.
Utilization (30%)
Credit card utilization represents the amount you have spent on your credit card relative to your personal credit limit. For example, if you have one credit card with a limit of $1,000, and your current balance is $500, your utilization is 50%. This value is combined for all instruments on your credit report. To keep growing your score, you want to keep your utilization in the 10–30% range, but even less if possible.
If you find yourself over the recommended utilization, you may start to see drops in your credit score. There are two things you can do to regulate the value and start rebuilding your score:
– Request a higher credit limit on your credit card
– Apply for a new credit card
You could also lower your utilization by paying your credit card off earlier than required but that isn’t always a viable option.
Also, please contact a professional before making any decisions, such as taking on new debt, as everyone’s situation is different.
Average Age of Accounts (15%)
Similar to the first point about payment history, the average age of accounts tells providers how much experience you have with credit, and they tend to associate that with trust. The longer you hold an account, the better. This makes it rough for younger individuals who haven’t had the chance to build their average age of accounts figure, and therefore less significance is put on this factor.
The average age of accounts figure is also used to find individuals who acquire a lot of debt and quickly get rid of it. This could be people who apply for a credit card, then cancel it soon after, which is not an attractive feature for creditors.
Credit Mix (10%)
This portion of your credit score refers to the “diversification” of your credit accounts. The different accounts you may find on your report are: installment loans, revolving debt, mortgages, and open accounts. Don’t worry too much about this factor if you’re just starting out, as naturally you’ll gain a healthy credit mix with time.
Installment Loans: Installment loans are what you would typically think of when you hear the word “loan”. Once these loans are paid off, they are done. An example of this would be a car loan or a student loan.
Revolving Debt: Revolving debts most commonly come in the form of credit cards or lines of credit. These are loans that are taken out at different amounts at different times, up to a certain limit. Once paid off, they are still available to use, which is the main difference from installment loans.
Mortgage: A mortgage is a loan to fund a real estate purchase. It is classified as an installment loan, but due to its nature of higher values and unique purpose, it’s classified separately on your credit report.
Open Accounts: open accounts are typically service-based contracts, as opposed to traditional loans. The most common example is a monthly phone plan.
Hard Inquiries
A hard inquiry occurs when you request a new debt account. You will always be informed before a hard inquiry occurs. This is a probe into your credit report so that creditors can decide if they want to give you credit.
The general idea is: the more hard inquiries you have, the worse your score will be. It’s important to note that the ding to your score should wear off in around 6 months’ time, so it’s much more important to work on the other factors first.
Takeaways
These are the main factors influencing your credit score, and affecting your ability to acquire debt. It may not seem important at a young age, but your score will be one of the determining factors when making big decisions, such as purchasing a home or a vehicle.
Focusing on all aspects of your credit report, especially “PAYING YOUR CREDIT CARD BILL ON TIME” is essential.
Thanks for reading, and I hope you learned a thing or two. Let us know in the comments if you’d like to see any other topics in an article, and subscribe to our newsletter to stay up to date with the latest news!