Beginner’s Guide to Credit Scores [And 5 Great Tips to Build Credit]

Five pieces of credit data go into a credit score. Payment history; Amounts you owe; length of your credit history; Credit card, and your new credits.
Infographic of someone looking at their credit score

When credit scores were first adopted, they were a new and mysterious concept – many people had no idea how they worked. As time passed, people began to learn about credit scores and how it could affect their ability to qualify for financing, as well as the interest they would pay. But what is it about these factors that go into determining your credit score?

Well, five pieces of credit data go into a credit score. Interestingly, you don’t need an advanced degree to understand them. This post looks into factors that go into a credit score and other aspects related to your FICO score.

Factors That Go Into Credit Score

A credit score is made up of a three-digit number, typically between 300 and 850, used by lenders to predict your ability and likelihood of paying your credit obligations on time. As such, it’s used by different lenders to decide how much they’re willing to pay. Generally, the higher your credit score, the less risky you are to lenders and the higher you are to qualify for loans. 

Knowing the core factors that affect your credit score gives you virtually everything you need to improve it over time. Here is what goes into your credit score:

1. Payment History (35%)

Lenders are most concerned about your ability to pay your obligations on time. However, when it comes to figuring out your credit score, your payment history accounts for 35% of it. This includes details of how you’ve paid bills in the past.

Payment history, which is essentially your bill-paying track, shows whether you make payments on time if you miss payments, how late you pay, and your accounts that were sent to collections, if any. 

While a single missed payment might not destroy your credit score if the rest of the report is in good shape, any single missed payment can drastically lower your score. You can also expect other payment-related factors, like charge-offs, repossessions, bankruptcies, and foreclosures, to have a significant negative impact on your score.

Typically, a higher proportion of on-time payments translates to a higher score, keeping other factors constant. 

2. Amounts Owed (30%)

Credit scoring takes into account your credit utilization ratio, which is the amount of debt you have compared to your available credit limits. So even if you pay your obligations on time, you might approach a breaking point. 

Your credit utilization ratio gives a snapshot of how reliant you are on non-cash funds. But, of course, owing money to credit accounts doesn’t necessarily mean you’re a high-risk borrower. Instead, lenders consider you a higher risk if you’re using a lot of your available credit. 

Generally, keeping your credit utilization ratio low helps you improve or maintain your credit score. For this reason, try to keep your credit balance about less than 30% of your credit limit.

3. Length of Credit History (15%)

How long you’ve held credit accounts is the third-most influential factor in credit score and accounts for up to 15% of your score. Unfortunately, FICO won’t consider your age. Instead, the age of your credit accounts (the oldest, newest, and average age of all your credit accounts). 

Generally, long-established credit accounts and an older average age of accounts have a positive impact on your overall credit. However, this is true only if the older accounts have low credit utilization and no late payments.

4. New Credit (10%)

Starting too many new credit accounts in a short period of time indicates a great risk. It’s more detrimental if you have a short (younger) credit history. As you would expect, applying for new credit cards and hard inquiries can hurt your credit score.

5. Credit Mix (10%)

Accounting for up to 10% of your credit score, credit mix essentially refers to the types of credit accounts you’re using. Having a diverse portfolio of well-managed credit accounts is a great asset to your credit score, albeit contributing a small percentage. 

Having a variety of credit accounts — credit cards, finance company accounts, installment loans, mortgage loans, and retail accounts — shows that you have experience managing a mix of credit and can significantly boost your credit score.

What Can Hurt Your Credit Score

Infographic of people looking at their credit score

Your credit score is a derivation of the data in your credit report. As such, even having a good credit score doesn’t make you invincible. You can definitely expect a bend in credit score factors will have a negative impact on your score. 

Here are some of the things that may hurt your credit score:

  • Making late payments and not paying bills on time
  • Applying for a lot of credit in a short time period
  • Transferring balances to a single card
  • Canceling zero-balance credit cards
  • Holding high credit card balances
  • Abandoning credit-related activities for a long period
  • Bankruptcy
  • Collections and charge-offs
  • Co-signing credit applications
  • Too little credit
  • Errors in your credit 

Several things can harm your credit score. However, having a strong knowledge of how credit scores work can help you avoid them. 

How to Build Credit From Zero

It’s almost impossible to get an excellent credit score in a single day, but you have to establish it at some point. Here are tips for building your credit score from scratch to excellent. They allow you to get the best terms on financial products, such as mortgages and credit cards. 

1. Become an authorized user

It’s pretty difficult to get approval for a loan or credit card if you don’t have any history of managing credit accounts. You can be deemed an authorized user on a family member’s card and update your card as an added user of the primary cardholder. You can also use your card to make purchases if the card owner permits. With time, the credit account and payment history will appear in your credit score, making it easy to establish a credit score. 

2. Apply for a secured card

Applying for your secured credit card is much easier and an excellent way to establish your credit score from zero. Even though you have to pay a secured upfront amount, it’s worth it because the amount you pay “secures” your card and makes you a low-risk borrower.

3. Apply for a store card

If you frequent a particular store that offers credit cards, you should apply for one. You’ll do the essential shopping you planned on, and, in return, your shopping history is used to develop your credit score. However, keep in mind that credit cards offered by business stores charge a bit higher interest rates than other credit cards. 

4. Report rental payments

If you pay rent every month on time, that payment pattern can help you develop a good credit score. Typically, rent payments are not included in credit reports, but if you ask your property management company or landlord, they can help you give reports of timely payments. This report is often used to develop credit scores.

5. Pay off installment loans

You can grow your credit score by taking manageable installment loans and paying them on time. You may also take personal loans and pay in installments. Either way, paying on time can help you establish a healthy credit score.

Final Thoughts

Understanding all that goes into a credit score can help you avoid things that can hurt your score. If you’re struggling to boost your score, the ultimate way to improve it is by using loans and credit cards responsibly and making payments on time.

You might also be interested in: 10 Tips To Improve Your Credit Score Today

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