Almost anyone knows how important it is to have a good credit score. A good credit score helps borrowers access loans and more favorable interest rates when borrowing money. A good credit score is the beginning of financial health today.

But do you know how a credit score is determined? Understanding what’s used to determine the score is half the battle towards achieving a higher credit score. Here are some of the top factors:

ON-TIME PAYMENT PERCENTAGE

Good creditworthiness means paying bills on time. This is the percentage of payments made on time for the duration of the credit history. It plays a significant role in determining creditworthiness. Just a couple of late payments could significantly impact the score for the worse. The best way to avoid late fees is to set up automatic bill payments. Another helpful method is to place a reminder on the calendar.

CREDIT CARD AUTHORIZATION

The percent of the total credit card balances divided by the entire credit card limits provides creditors with the full available credit used. The lower the credit card utilization, the higher the credit score.

TOTAL ACCOUNTS

More is better to a point. Consumers that have more “lines of credit” can have higher scores because it shows lenders are willing to give credit. It’s best to have a good mix of different types of credit for good credit health. The caveat… Only apply for the credit you need.

HARD INQUIRIES

A “hard” credit inquiry is initiated on the credit report when applying for a mortgage or auto loan. One question has little impact on a credit score. Multiple searches begin to erode the score and can have a more significant effect. A “soft” inquiry occurs when you check the rate to determine eligibility. If uncertain, check with the potential creditor or lender before applying to see if they’ll do a hard or soft pull on your credit.

AVERAGE AGE OF OPEN CREDIT LINES

The longer the line of credit, the stronger the credit rating. Keep older cards open and active. Start applying for credit early in life.

DEROGATORY MARKS

Negative terms on a credit report include collections, tax liens, or bankruptcy. Derogatory remarks can remain on your credit report for 7-10 years. It shows a lender mismanagement of credit may have occurred. Start rebuilding healthy credit again. It will improve your credit rating and gradually weigh in your favor.

 

For more information, contact Treasure Coast Insider Blogger Mona Leonard at 772-530-6131 or mona@monaleonard.com.