Credit Cards

The Five Components of a Credit Score

The Five Components of a Credit Score | Young Finances

There is no denying that a high credit score is important for purchasing a home, renting an apartment and even being hired by certain employers. When you have poor or no credit, it is important to know how to improve your credit score.

Improving your credit score hinges on 5 key components as outlined below.

History of Credit

Determining your credit worthiness is, in part, decided on by how long you’ve been holding credit. The longer you have successfully been using varying types of credit, the better a consumer you will be, thus making your credit score higher.

If you have an older account that you are not using, keep it open. This will continue to help your credit history thus improving your credit score.

Payment History

Nothing affects your credit score more than your payment history. If you have maintained on-time payments over a course many years, your credit score is going to reflect that. The best way to improve a lower than desired credit score is to make on-time payments each and every month without fail.

Credit Limit to Balance Ratio

The ratio of how much credit you are provided to how much you actually owe is another large component of a credit score. Lenders are looking to make sure that you have not over extended yourself. Aiming for a 20% debt ratio or lower is best. That is to say that you should hold no more than 20% of your credit potential in debt. If you are extended $10,000 in credit, you would want to make sure that your total debt is less than $2,000.

Types of Credit

Credit lenders are also looking at the types of credit you are holding. A mixture of store credit cards, major credit cards and loans shows that you are capable of managing the different payment types and credit limits that comes with them. Credit cards typically have small minimum payments and a lender who is looking to extend a loan with a larger payment will want to feel confident that you can handle a regular payment that may be significantly higher.

Frequency of New Credit Received

Credit lenders are also looking at how often you are applying for and receiving new credit. A large number of new credit cards could indicate that you are having troubles with your financial situation. It could also indicate a potential for over extending credit. Conversely, lenders are looking to see if there are frequent inquiries into your credit as well. This could indicate financial problems as well.

The exact amount that each of these components affects your credit score is unknown but diligence with each one will ensure you a high credit score as well as maintain a healthy financial situation.

This article was written by Jessica at Everything Finance. Everything Finance is a site about just that, everything related to finance. You can get information about investing, saving money, shopping, blogging, and making money online. If you like what you see here, make sure to stop by or better yet subscribe to our feed so you don’t miss a thing.

 

Are you ready to build credit wisely? Click here to see the card I recommend as the best credit card for young adults. The card allows you to get your credit score free each month.

 

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  • http://thecollegeinvestor.com Robert @ The College Investor

    Thanks for the breakdown!

  • http://everythingfinanceblog.com/ Jessica @Everything Finance

    You are welcome.

    Thank you for reading!

  • http://www.smartwealth.org Evan @ Smart Wealth

    Never thought about the credit limit to balance ratio having an impact to your credit score but that is a very good point.

  • http://ways-to-invest-money.com/ Thomas – Ways to Invest Money

    Great post on the components. I know that the one I never understand was the type of credit. I took me a while to get that having a car or home loan just weighed more as opposed to JC Penny card. A mixture is great but you have to understand somethings effect you more than others. And while its good to keep the cards active a low balance is key.

  • http://www.youngfamilyfinance.com Wayne @ Young Family Finance

    I believe that number of credit inquiries can also impact your credit scores. Also the type of inquiries. For example, lenders taking a “hard look” at your score for a home loan.

  • Neo

    I think frequently applying for credit will really hurt your credit score. Best to sign up for new credit cards only when you really need them.