Having good credit doesn’t necessarily mean what your paycheck says or what you have in the bank. The key to good credit is the ability to borrow money. That is all reliant on your credit score.
Your credit score affects buying a car or a house. It affects getting a reasonable interest rate. Moreover, it affects your future. Therefore, you need to understand why getting a good credit score is important and what you need to do to have one.
Here are three factors that affect your credit score:
The number one factor in determining your credit score is your payment history. SoFi shares that this can affect up to 35 percent of your credit score. If your credit history shows months of consistent payments, that is ideal.
However, if you miss payments, that is a nick in your credit. The key is to keep the damage at a minimum. For example, a 30-day late payment is less destructive to your credit score than a 60-day late or 90-day late payment.
Moreover, if you should be late with a payment, you must consistently make payments on time to rectify this. For example, if payments go beyond 90-days, it could mean a lien or a foreclosure. That is a public record and can severely hurt your credit score.
Total Amount Owed
How much you utilize your credit can impact your credit score. This can be up to 30 percent of your credit score calculation.
How do you determine the amount owed? Calculate your available credit for all of your revolving accounts. Take that total and multiply it by 30 percent. That is the maximum unpaid balance you should ever have on your credit cards.
Also, the number of cards that carry a balance can hurt your credit score. For example, they determine that over-extension is if you have multiple cards with a balance. If one card has a higher balance, remedy this quickly by paying off the card with a smaller balance.
In addition, installment loans such as student loans, automobile loans or personal loans are also part of this equation.
Length Of Credit
Lastly, how long you have had credit is worth about 15 percent of your credit score. The score is based on the length of all of your credit cards added up and then averaged out. That means that the first card you signed up for is one that you want to be sure to keep.
But, make sure that your old cards get used at least once a year. Banks will close out any card that is no longer in use.
Does applying for a credit card hurt credit? According to the experts at SoFi Invest, your credit score is also better if you do not have many credit cards. However, sticking to a few cards will keep your score higher.
Summing up, your credit score is based on your discipline and consistency. Your credit score will be high if you constantly pay on time, with even an occasional hiccup. But if your payment history looks like a rollercoaster ride, you need to do some work on improving it.