For consumers all over the U.S., having a good credit score can bring a range of big benefits, including lower interest rates, easier loan approval, waived security-deposit fees, better insurance rates and even more housing options — just to name a few. And in an effort to help our customers leverage some of these benefits for themselves, we discussed seven ways to quickly increase your credit score in a previous Arthur State Bank blog article.
But just what aspects of your finances have the biggest impacts on your credit score? Today, we’ll take a look at some of the financial factors that can be your credit score’s most significant influencers.
Consider these five things that have the biggest bearing on whether your FICO credit score — the measure used by most lenders to assess your creditworthiness — brings you financial benefits or presents you with persistent money-related challenges:
- Payment history: When lenders allow you to borrow money, their biggest concern is getting their money back. And this is reflected in your credit history being the most important factor affecting your credit score. Accounting for a whopping 35% of your total FICO score, this factor examines the timeliness of your past payments on credit cards, loans and other bills, along with how frequently you’ve been late making your payments and how long any late payments remained past due. When you’re late making payments on your debts, this can affect your credit score for up to seven years. It’s also worth noting that, in most cases, a late payment won’t be reported to Equifax, Experian or TransUnion (the three major credit bureaus) until it’s 30 or more days late — so don’t panic if you discover that you’ve accidentally missed a payment. Further, one solid strategy for avoiding late payments is to set up automatic payments for recurring bills.
- Credit utilization: The second most important factor in your credit score is your credit utilization, a measure of the amount of money you owe in relation to the total amount of credit you’ve been approved for — across all your lines of credit. Expressed as a percentage and known as your credit utilization ratio, this figure accounts for 30% of your FICO score. As an example, for a borrower who owes a total of $5,000 and whose total lines of available credit are $20,000, the credit utilization in this case would be 25%. Financial experts recommend keeping your credit utilization ratio well below 30% (both on individual lines of credit and across your credit lines as a whole) for the best credit-score results. Of note here, having high levels of approved credit and keeping your credit-line debts to a minimum is a recipe for credit score success here.
- Length of credit history: A factor that examines how long your lines of credit have been open, this component accounts for 15% of your FICO credit score — so having a long history of using credit and making on-time payments can provide a boost in this area. According to FICO, a trio of factors come into play here:
• the longevity of your lines of credit, including the ages of your oldest and newest accounts, plus the average age of all your lines of credit
• how long specific lines of credit have been established and available to you
• the length of time that has passed since you’ve used particular accounts
A smart tactic to consider here is to keep old credit lines open even after you’ve paid off all your debt on them, as this will help increase the average age of your credit accounts.
- Credit mix: Having and responsibly using a range of different types of credit — from revolving credit like credit cards and retail accounts to installment loans, mortgages, auto loans and finance company accounts — can also provide a boost to your credit score. Known as your credit mix, this factor accounts for 10% of your FICO score.
- New lines of credit: Accounting for the final 10% of your FICO credit score, this credit score factor examines the number of new credit accounts you’ve applied for recently. When you apply for a new credit card, a mortgage or another type of loan, a “hard inquiry” appears on your credit report when the lender behind the loan checks your credit file — and this can temporarily have a negative impact on your credit score (12 months with FICO). If a potential lender sees a high number of recent hard inquiries over a short period of time, it can indicate to them that you may be a high-risk borrower — which may cause the lender to reject your application. (An important note to consider here: Requesting your own free credit report from one of the three major credit-reporting agencies does not constitute a hard inquiry and will not impact your credit score.)
Proudly serving South Carolina since 1933, Arthur State Bank offers accounts and services to meet a variety of financial needs. To help you achieve all your financial goals, the bank offers in-person service as well as a range of convenient digital solutions. To learn how Arthur State Bank can help you with banking needs ranging from checking and savings to retirement accounts, mortgages, other personal loans and more, visit arthurstatebank.com.