There are a lot of factors that go into maintaining a healthy credit score. But which one is the least important? We’ve got the answer.
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The Five Factors of a Healthy Credit Score
There are five key factors that go into your credit score: payment history, credit utilization, credit age, credit mix, and new credit. Let’s take a look at each one and see how important they are.
One of the most important factors in maintaining a healthy credit score is paying your bills on time. Payment history is one of the five components that make up a FICO® Score, and it accounts for 35% of the total score.
A strong payment history shows creditors that you’re a responsible borrower who is likely to repay your debts. If you have a history of late payments or missed payments, it will be reflected in your credit score and could make it difficult to qualify for new credit products.
While payment history is an important factor in determining your credit score, it’s not the only factor. Creditors also look at your credit utilization, credit mix, length of credit history, and new credit inquiries when making lending decisions.
Credit utilization is the second most important factor in credit scoring, and it’s also one of the easiest factors for consumers to understand and influence. Credit utilization is a measure of how much debt you’re carrying compared with your credit limit. In general, the lower your credit utilization, the better for your score.
There are two things to keep in mind when it comes to credit utilization: first, that your overall utilization matters more than the utilization on any individual card; and second, that your credit card balances are reported to the credit bureaus at the end of your statement period (usually the last day of each month), so if you want to keep your utilization low, it’s best not to carry a balance from month to month.
There’s no magic number for credit utilization, but generally speaking, using 30% or less of your available credit should help you avoid hurting your score.
Payment history is the record you’ve established by making on-time payments and paying as agreed. It’s the most important factor in credit scoring, and even one missed payment can have a negative impact. Payment history also includes public record information, such as bankruptcies, foreclosures and lawsuits.
This is the amount of debt you are carrying compared to your credit limits. It’s important to keep your credit utilization low — generally below 30% — because high balances can hurt your credit scores. You can calculate your credit utilization by adding up all the balances on your revolving accounts — such as credit cards — and dividing that number by your total available revolving credit.
Also called length of credit history, this factor looks at the ages of all your accounts and weights them according to how long they’ve been open. Account ages are especially important for new credit users because they don’t have a long record to show creditors. The best way to lengthen your credit history is simply to keep old accounts open and active by using them occasionally.
Creditors like to see that you can manage different types of loans, such as installment loans (like auto loans) and revolving lines of credit (like credit cards). A variety of account types may help improve your scores, but having just one or two will likely not have a significant impact.
New Credit Applications
Whenever you apply for new credit, an inquiry appears on your report and may slightly lower scores. But inquiries have relatively little impact on scores if they are spread out over time; generally speaking, multiple inquiries within a short period will have less of an effect than a single inquiry that occurs several months before scoring.
Types of Credit
There are five basic types of credit in the FICO scoring system:
-Installment loans : these are loans with a set number of payments, such as auto loans, student loans, and mortgages.
-revolving loans : these are lines of credit with a variable number of payments, such as credit cards.
-short-term loans : these are typically payday or title loans with very short repayment terms.
-open-ended accounts : these are accounts that do not have a set number of payments, such as utilities and rent.
-inquiries : these are requests for your credit history from potential lenders.
New credit is the least important factor in maintaining a healthy credit score. The other four factors are:
-Length of credit history
The Least Important Factor
Your credit score is important. It is a number that lenders use to determine your creditworthiness. A good credit score means you’re more likely to be approved for loans and credit cards. A bad credit score can make it difficult to get a loan, rent an apartment, or get utility services. There are many factors that affect your credit score, but some are more important than others. So, which is the least important factor in maintaining a healthy credit score?
While credit utilization and debt levels are both important factors in calculating your credit score, payment history is actually the most important factor. Payment history accounts for 35% of your score, which means that even if you have high levels of debt or credit utilization, as long as you make your payments on time, your score will be relatively high.
Credit utilization, also known as your “debt-to-credit ratio,” is the percentage of revolving credit that you’re currently using. Lenders use this number to get a general sense of how risky you are as a borrower — the higher your credit utilization, the greater the chance that you’ll miss a payment or default on your loan.
For most people, the sweet spot for credit utilization is around 30% — that is, you should use no more than 30% of your available credit at any given time. (This number can vary slightly depending on the scoring model being used.) Anything above 30% is generally considered to be too high, and will start to hurt your credit score.
That said, credit utilization is not the be-all and end-all of maintaining a good credit score. In fact, it’s actually one of the least important factors — which is good news if your debt levels are high, because it means there are other things you can do to offset the damage.
Here’s a quick rundown of the five most important factors in your credit score:
1. Payment history: This is the biggest factor in your score, accounting for 35% of your total. Simply put, if you’ve been paying your bills on time and as agreed, you’re in good shape here. If not, you’ll need to work on getting this up to par before anything else.
2. Credit utilization: As we mentioned above, this is the percentage of revolving credit that you’re currently using — and it makes up 30% of your score. So if your credit utilization is high (above 30%), it will drag down your score — but it’s not nearly as important as payment history.
3 .Credit history: This one accounts for 15% of your total score, and refers to the length of time you’ve been using credit. The longer you’ve been borrowing money and making payments on time, the better — so if you’re just starting out, don’t worry too much about this one. You’ll build it up over time with responsible borrowing and repayment habits.
4 .Credit mix: This makes up 10% of your score, and refers to the different types of debt that appear on your report (e.g., mortgage loans, auto loans, student loans, etc.). Lenders like to see a mix of different types of debt because it shows they’re willing to take on different kinds of risk — but again, this isn’t a make-or-break factor in terms of maintaining a healthy score.
5 .New credit applications: Finally, this one accounts for 10% of your total score., which refers to any new lines of credit that appear on your report (including things like hard inquiries from lenders). Every time you apply for new credit , it gives lenders another way to assess risk — so too many new applications in a short period of time can hurt your score
Credit history is one of the most important factors in maintaining a healthy credit score. However, it is not the only factor. Payment history, credit utilization, and credit mix are also important.
Credit history is the length of time you have been using credit. The longer your history, the better your score will be. Payment history is a record of how you have handled your credit accounts in the past. Late payments, collections, and bankruptcies will hurt your score. Credit utilization is the amount of credit you are using compared to the amount of credit you have available. It is best to keep your utilization below 30%. Credit mix is the variety of types of credit you have. It is good to have a mix of installment loans (like auto loans) and revolving lines of credit (like credit cards).
Types of Credit
The least important factor in maintaining a healthy credit score is the type of credit you have. Whether you have revolving credit, such as a credit card, or installment credit, such as a car loan, has little impact on your score.
The most important factors in maintaining a healthy credit score are your payment history and the amount of debt you have relative to your credit limit.
New credit is only 10% of your credit score—in other words, it’s the least important factor. The new credit category looks at how many new accounts you have and how recently you’ve applied for credit.
Opening too many new accounts in a short period of time can hurt your score, even if you pay your bills on time. That’s because it can send a red flag to lenders that you may be in financial trouble or that you’re taking on more debt than you can handle.
If you are planning to apply for a major loan, such as a mortgage, it’s best to do it before you start opening new lines of credit. That way, the hard inquiries from your loan applications won’t drag down your score too much.