In today’s world, credit scores reflect creditworthiness. The better your score, the better your chances are that you’ll receive credit when you apply for it. But while many people know approximately what an average credit score is (i.e. 670 or so), few people know what goes into the making of that score. Let’s take a look.
Payment History – This is the largest and most heavily weighted portion of any credit score. It reflects how well you’ve made your credit payments in a timely fashion. If you’ve been 30, 60, 90 days or more late with any payment it will show up on your credit report and lower your credit score.
Amount You Owe – Most lending institutions want your existing debts to be as low as possible before they loan you more money. They love to see your debt as a small portion of your income and they also like it when you haven’t maxed out your existing credit. If your existing debt is too high in comparison to your income or if you have very little credit left, your credit score will suffer.
Credit History – Banks love a long credit history. The longer you’ve been handling credit and debt, the more of a “known quantity” you are. And if you’ve been handling your debt wisely, your credit score will receive a boost.
New Credit – If you’ve recently been trying to acquire more debt, new credit cards and such, lenders get nervous. A few attempts here and there aren’t worrisome, but past a certain number, lenders feel you may not be handling your finances well. The result is another ding to your credit score.
Credit Mix – Banks really like to see a balance of different types of debt in any customer’s portfolio. An applicant that has a car loan and a credit card or two along with a mortgage is a seasoned consumer in their books, experienced in the ways of credit, debt, and payback. On the other hand, if you have just a few credit cards, your credit score will drop a bit.
All in all, these are the major components of a credit score. If you can keep these under control you can control your credit score. If you fail in any one of these areas your score isn’t likely to drop too much but fail in a few, or all areas, and you’ll definitely end up with a bad credit score.