Although each credit reporting bureau keeps the specifics of their credit scoring models a closely guarded secret, the general categories that factor into credit scores are widely known. In general, here’s what goes into a credit report, which is then used to calculate your credit score:
- Payment history, approximately 35%: Paying the amount due on your tradelines (credit line) on time every month is extremely important. Late or missed payments could result in derogatory marks that bring down your score. It’s a good idea to have several different tradelines that are in good standing since this category is weighted so heavily. If you do have a derogatory tradeline, it is important to maintain a perfect payment history on the rest of your tradelines to balance out the negative mark on your report. You always want your good history to outweigh the bad.
- Utilization, or how much you owe, approximately 30%: Your utilization ratio is the ratio of how much you owe on all your revolving accounts (e.g. credit cards) to your total available credit, expressed as a percentage. Credit bureaus may consider both your overall utilization ratio and the utilization ratio of each individual tradeline. The lower your utilization, the better—it is generally recommended to keep your utilization below 30% but having it lower than this is even better. Therefore, tradelines with high utilization can hurt your score, while tradelines with low utilization can help your score.
- Length of credit history, approximately 15%: This category considers factors like the average age of your tradelines, the oldest tradeline in your credit file, and the ratio of “seasoned” to non-seasoned tradelines. A seasoned tradeline is generally considered to be one that is at least two years old, at which point it is believed that the tradeline begins to have a more positive impact on your credit file. The older your tradelines are, the better impact they will have on your credit report. Since length of credit history goes hand-in-hand with payment history, together making up 50% of your credit score, generally, age is the most powerful factor of a tradeline.
- Credit mix, approximately 10%: Creditors want to make sure that you can manage different types of credit, so they look for a balanced mix of different tradelines in your report. The most important thing is to have tradelines in both of the two major categories: revolving credit and installment loans.
- New credit, approximately 10%: Credit scoring models take into account any new inquiries and new tradelines that you have added in the past 6 to 12 months. Generally, opening a new primary tradeline can have a temporary negative effect on your score, since it has no age and the person has not demonstrated their payment behavior on that account for very long.
How to Build Credit
The best way to build a good credit record is to open a variety of tradelines (lines of credit) and keep them in good standing by making payments on time and keeping the utilization low. Opening a credit card is a common way to establish a credit file and start building credit, but it is not the only option. Other paths to building credit include taking out student loans, auto loans, or secured loans.
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