YPP011: THE SIMPLE GUIDE TO BETTER UNDERSTANDING YOUR CREDIT SCORE

Are you ready to increase your credit knowledge and your score?

Here’s a guide that briefly explains the five components of your credit score. Understanding each component is important if you want to attain and maintain a high credit score.

Component 1. Payment History

Your credit score is largely based on your ability to pay your bills on time each month. Roughly 35% of your total score is dependent on a great payment history, primarily payments made within the last six months.

Component 2. Credit Utilization

Credit utilization can be defined as the ratio of your credit debt to your credit limit and is about 30% of credit score.

You can calculate your current percentage by following the equation below:

((Current credit balances) / (Current credit limits)) x 100 = Credit Utilization Percentage

In order to maintain a higher credit score, aim to utilize less than 20% of the credit that has been extended to you. So, if you have $10,000 in total credit across all lines of credit, carry a $2,000 credit balance or less at any point in time.

Component 3. Length of Credit History

Having a longer credit history is important and contributes roughly 15% to your credit score. This component shows how responsible you are with lines of credit over time.

Also, keep old lines of credit open. They help increase your credit utilization limit and they lengthen your credit history.

Component 4. Numerous Credit Inquiries

Hard credit inquiries can negatively impact your credit score and is approximately 15% of your credit score. Some inquiries can drop your score as much as 35 points if you exceed more than two within a year! So, be strategic when applying for new lines of credit.

Component 5. Various Types of Credit

Having a mix of lines of credit seems to contribute around 10% to your overall credit score. It is ideal to have a both installment and revolving accounts in your credit portfolio. Typical installment accounts are mortgage and auto loans. Typical revolving accounts are major credit cards and retail store cards.

As you continue to build your credit score, be mindful of the five components listed above to avoid damaging your credit score.

Question: Do you analyze your credit report and attain your credit score yearly?  Leave your response in the comment section below. 

2 Comments on YPP011: THE SIMPLE GUIDE TO BETTER UNDERSTANDING YOUR CREDIT SCORE

  1. Bob Gilewski
    February 4, 2016 at 22:43 (2 years ago)

    Excellent information Tara. Concise and to the point. Knowing how the Credit Score Algarithim works is giving people knowledge which equals power. Thanks!

    Reply
    • Tara J.
      September 11, 2016 at 11:27 (1 year ago)

      Thanks Bob for those kind words! Financial knowledge is financial power which is the mission!

      Reply

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