5 Factors Affecting Your Credit Score

Your credit score is an important indicator to lenders, potential landlords, service providers, and even employers of your financial stability and responsibility. While credit scores may fluctuate from person to person, credit reporting agencies typically use the same five factors to calculate your score. Understanding how those factors affect your score can give you a better picture of your overall financial health, as well as help you address any areas of concern.

Payment History
One of the most important components of your credit score is your payment history, which includes any late payments, loans sent to collections, bankruptcies, and more. Credit reporting agencies use this information to determine whether or not you are responsible and financially stable enough to repay your loans and make your bill payments on time.

Amounts Owed
Your credit score also takes into account how much debt you have compared to your available credit, also known as your credit utilization ratio. Credit reporting agencies like to see that you can responsibly manage the money loaned to you. Try to aim for a healthy debt to credit ratio of less than 30%. While less is better, it’s important to note that always having a $0 balance on accounts and loans likely won’t result in a higher score.

Length of Credit History
Before you cancel that credit card, be sure to consider how it could impact your credit score. The length of your credit history and the age of your current accounts and loans all play an important role in how your score is calculated. Time and patience are key, as building a good score often requires establishing a trend of responsible credit management.

New Credit
Credit reporting agencies also take into consideration any recent loans or lines of credit when calculating your score. Be aware that agencies often view opening numerous accounts in a short period of time (typically 12 months) as a red flag indicating cash flow problems or plans to take on a lot of new debt. Additionally, opening new accounts may lower your average account age, which, in turn, could impact your credit history. Try not to open too many credit accounts too rapidly.

Types of Credit in Use
While compiling your score, agencies like to see that you can responsibly manage different types of credit, including credit cards, retail accounts, personal loans, and mortgages. They will also look at how many loans or lines of credit you have had in your name. It’s important to note that a closed loan or line of credit and its related credit history will still be reflected in your score. Also, avoid opening a new loan or line of credit just to increase your mix of credit types, especially if you don’t intend to use them or have a long credit history.
Your credit score can play a vital part in financing a vehicle, securing an apartment, and even landing a job. BHFCU has a variety of products and services to help you better manage your finances and the factors affecting your score. Our friendly, knowledgeable staff would be happy to visit with you about your unique financial situation.