raman Staff answered 4 months ago
Your credit score is a numerical representation of your creditworthiness, indicating to lenders how likely you are to repay debts responsibly. It’s calculated based on several factors, each carrying a different weight in determining your overall score. Here’s a breakdown:
Payment History (35%): This is the most crucial factor in your credit score. It reflects whether you’ve made payments on time for credit accounts, loans, mortgages, and other debts. Late payments, defaults, bankruptcies, and accounts sent to collections can significantly lower your score. Consistently paying bills on time improves your score.
Credit Utilization (30%): This measures the amount of credit you’re using compared to your total available credit. It’s calculated by dividing your total credit card balances by your total credit card limits. Keeping your credit utilization low, ideally below 30%, demonstrates responsible credit management and positively impacts your score. Higher utilization suggests higher risk to lenders.
Length of Credit History (15%): This factor considers how long you’ve had credit accounts open. Lenders prefer to see a longer credit history as it provides more data to assess your creditworthiness. Generally, the longer your credit history, the better, assuming you’ve managed it responsibly. Closing old accounts can shorten your credit history and potentially lower your score.
New Credit Inquiries (10%): Whenever you apply for new credit, such as a credit card or loan, lenders typically perform a hard inquiry on your credit report. Too many hard inquiries in a short period can indicate financial distress or a high-risk borrower, potentially lowering your score. However, multiple inquiries related to rate shopping for a single type of loan (like a mortgage or auto loan) within a short timeframe typically count as a single inquiry and have a minimal impact.
Types of Credit Used (10%): Lenders like to see a mix of different types of credit, such as credit cards, installment loans (like auto loans or mortgages), and retail accounts. Having a diverse credit portfolio suggests that you can manage various types of credit responsibly. However, this factor’s impact is minor compared to the others.
Understanding these factors can help you make informed decisions to maintain or improve your credit score. Regularly monitoring your credit report for errors, paying bills on time, keeping credit card balances low, and avoiding opening multiple new accounts simultaneously are key strategies for maintaining a healthy credit score.