Your credit score is key to financial flexibility. It’s often used when you buy a house, get a car loan, open a bank account, or do just about anything that requires a third-party to have financial confidence in you.
What goes into a credit score? How do you avoid bad credit? Let’s look at the three most important things impacting your credit score and what you can do to improve it.
Your Payment History
According to the Fair Isaac Corporation (FICO), the company responsible for the credit score used by 90% of the top lenders, your payment history makes up more than one-third of your overall credit score. Whether you make your payments on time is a massive indicator of how financially reliable you are, which is why it has such an impact on your credit score.
Does it really matter if you miss a few payments? Yes. One late payment can stay on your credit report for up to seven years. Of all the things you can do with your money, making payments when you say you’re going to make them is incredibly important.
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The Amount of Money You Owe
The second most important thing impacting your credit score is how much you owe. Remember, a credit score is a numerical number that attempts to represent how likely you are to default on a loan. When your outstanding loan total makes up 30% of your overall credit score, keeping debts low makes you a more worthwhile prospect to a lender than someone struggling to stay afloat.
If you want to avoid bad credit, do everything in your power to demonstrate a lower risk to lenders. One of the best ways to do this is by paying down existing debt.
The Length of Your Credit History
The third biggest factor that goes into your personal credit score is the length of your credit history. In simple terms, this 15% of your credit score is dictated by how long you’ve been doing things that demonstrate good or bad borrowing habits. If you have just started utilizing and building credit, you’re going to have a shorter credit history. If you’ve been borrowing and paying back money successfully for a long time, the longer credit history makes you more reliable on paper to lenders.
Don’t feel bad if you’ve just started building your credit history. If you keep doing the right things repeatedly, your credit history length will grow, and your score will go up.
Putting The Rest Together – Avoiding Bad Credit
Although we’ve talked about the three largest factors that could impact your credit score, there are plenty of other variables that can change your score in an instant. From your overall credit mix and new credit inquiries to bankruptcies, your financial past can quickly change your present.
In the end, if you want to improve your credit score and avoid the pitfalls that come with poor credit, all you have to do is demonstrate that you’re a trustworthy borrower. Live up to your obligations, make your payments on time, and don’t get overextended. If you do these things repeatedly, you’ll be a credit score rockstar in no time. If you want to learn more about building your credit score, check out our article, “3 Tips to Improve Your Credit Score.”