The most important component of your personal finance is the credit score. If you have a very low credit score, there is a risk of getting very many things such as bank loans, insurance, mortgages, and even phone contracts declined. The credit score ranges from 300 to 850. To get the highest possible score, it is important to understand the five most important factors that determine the score.
Personal payment history
This is one of the most important components when calculating personal credit score because it determines whether one is trustworthy after cash is lent to you. The payment history accounts for 35% of the credit report. The personal history is determined by the following;
- Whether you have paid all the bills reflected on the credit report on time
- For a person who was late with credit repayment, the credit history wants to establish with how long. Were you late with 30, 60, 90 or more days? The later you repay, the poorer the score.
- Have any of the personal accounts been submitted to a collection firm? This is an indication that you have already defaulted and there is a risk that you will not pay back.
- Are you having charge offs, liens, suits, foreclosures, or bankruptcies? These are the worst things can pull the credit score to the lowest point.
The amount owed
This factor is very critical because it accounts for 30% of your credit score. The components of the amount owed include;
- The total available of debt used. The lower the debt used, the better. Remember that owing a little is better than having nothing at all.
- The amount owed to specific accounts including credit cards, mortgage, and bank loans.
- The total amount that one owes. The less, the better.
Credit history length
Your credit history accounts for 15% of the credit score. This factor wants to establish the length of time that an individual has been using credit by looking at the oldest account and average of other accounts. Note that even if the credit history is short, it is still okay as far as payments are made on time and you owe only a little.
The new personal credit
This is the number of recently opened accounts, and it accounts for 10% of your credit score. The score estimates that if several new accounts were opened recently, one is a greater credit risk. Many people open new credit accounts when there are issues in their cash flow or plan to take new debts.
The type of credit you are using
The last thing that contributes 10% of your credit rating is the types of credits you are using. The focus here is establishing which specific credit lines you are using including installment loans, credit cards, store accounts, and mortgages among others. There is no need to worry if you only have one or two credit accounts as far as credit is paid on time. However, consider increasing the credit types with time.
By understanding the factors that contribute to the credit score, you can work towards enhancing them for better results. Note that the first two are very weighty and, therefore, you should always maintain a good history and pay debts on time to enjoy a high score.