When it comes to your finances, there is nothing (save for your social security number) more important than your credit score. Whether you’re looking to purchase your first home, finance a vehicle or take out a loan in order to cover a big expense, your credit score will often be the deciding factor in whether a lender will work with you or not.
While most of us are well aware of just how important a good credit rating is, very few people have ever learned exactly how the score is calculated and what factors can affect it. Obviously, if your bills are paid on time, this affects your credit positively. Alternatively, your credit score will be affected negatively. But what about those other, less obvious factors?
In addition to late or missed payments, your credit may be adversely affected if you have late or missed payments, have claimed bankruptcy (or have any liens or foreclosures), have had multiple long periods of unemployment, or if you’re using more than 80% of your available credit.
If you have a number of credit cards, and they’re all maxed-out, a lender will assume that you are having money problems and may be unable to pay your bills on time. The same can be said if you have multiple inquiries on your credit report; if you’ve applied for multiple cards, a lender will assume that you are having financial difficulties and are dependant on your credit. Each time a lender denies your credit request, it is also reflected negatively on your credit rating. Keep in mind- credit scores can fluctuate, and can even vary between different credit bureaus as different lenders report to different bureaus.
In order to build a good credit rating, you will first need to ensure that you are making your payments in full and on time- and, preferably- are paying more than the minimum amount each month. Generally speaking, your payment history will contribute to 35% of your credit score. The length of your credit history is also an important deciding factor, and contributes to 15% of your score.
Your outstanding debt is also considered when applying for a loan. Ideally, your credit card balances should sit at or below 25% of your available credit. The total amount of money you owe is reflected in your credit score.
Many people mistakenly believe that it is good for your credit to have multiple credit cards. In reality, the more cards you have, the lower your credit score will be (especially if all of these cards are maxed-out). If you must have a credit card, it is best to stick with one (or two, at most). Use these cards only in emergencies, and keep the balance low.
Fortunately, your credit rating will not follow you around forever. You can change a bad credit score. When you are paid, focus first on paying towards credit card and other debt then pay all other bills. Provided the minimum balance (and preferably more) is being paid every month, on time, your credit rating will improve.
Next, focus on paying off at least one (or more) of your loans. If you have multiple credit cards, pay off all but one or two and cancel them. Finally, try to maintain steady employment, as people with regular jobs are viewed as better able to pay their bills in a timely fashion.
If you’re serious about changing your credit score for the better, you will need to eliminate your bad credit habits. Once these changes have been made, your credit rating will continue to climb with time.
Best of luck,
Lynne Whiteley, Founder
