Understanding Your Credit Score
Factors Affecting Your Score
This comprises 35 percent of your total credit score and reflects both the positives and the negatives of your payment history. You may feel that paying off your revolving credit accounts (credit cards and other lines of credit) is a good thing, but losing a long-standing account, especially one with a good payment history, can hurt your credit score.
This comprises 30 percent of your score and ideally, you want your revolving credit balance to be no less than $50, and no more than 30% of your limit. For example, if you have a $1000 credit limit, you’ll want to carry no less than $50 and no more than a $300 balance.
Length Of Credit
How long you have been utilizing credit will contribute to 15 percent of your credit score. This is why it’s important to start building your credit early—and correctly—following the guidelines in point 2 above.
New credit refers to opening new accounts with credit limits over $2500, and contributes 10 percent of your credit score. Remember, having multiple credit checks brings your score down, incrementally, so unless you’re certain you’ll qualify, don’t apply! Wait until you have improved your score via other means and then apply.
Types Of Credit
Types of credit is the last 10 percent of your score. There are two types of credit: Installment accounts and revolving accounts. Examples of an installment account would be a car, loan or lease; or a house mortgage. These are fixed amount loans, where your available credit is essentially “maxed out.” When you buy a car for $15,000—the dealership issues credit for $15,000, nothing more than that. So you have used 100 percent of your available credit. When you look back at point two, it should be clear why that’s not ideal. Then there are revolving accounts. Those are your credit cards and home equity lines of credit. These are ideal for raising your credit score because you can utilize a portion of it, instead of the entire amount.