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Your credit score is important, because it determines whether you can get a credit card, a loan, and more. However, if you’re like a lot of people, you don’t really understand how credit scores work. Here’s a rundown on credit scores, and the factors that have an impact on your credit.

  • There are two primary scoring companies in the United States, FICO and VantageScore. These models these companies use vary a little bit, but they have some things in common.
  • Payment history strongly impacts your credit score. In fact, it accounts for about 35 percent of your score for both FICO and VantageScore. This is the record of whether or not you pay your bills on time. Creditors report both good and bad payment activity, and while a single late payment isn’t likely to hurt your score, several late payments can have a negative impact. This includes late payments for credit card bills, student loans, mortgage loans, and car loans, but not typically things like your utility bills or phone bill. If you’re several months behind on any bill, though, it can damage your credit.
  • The other thing important in each model is amount of debt, also known as your credit utilization ratio. This makes up 30 percent of your credit score. Also known as your credit utilization ratio, this is calculated by comparing the amount of credit extended to you to the amount of credit you’re using. Experts recommend using 30 percent or less of your available credit.
  • Age of credit accounts, or history, makes up another 15 percent of your score. The longer you’ve had your accounts the better, so try not to close out your older accounts if possible.
  • 10 percent of your score is the mix of your credit accounts. A good mix of revolving and installment accounts is beneficial. To have a good credit score, it’s good to have a diverse portfolio of credit accounts with loans that have set installment payments, like a car loan or mortgage, and revolving accounts, like credit cards.
  • New credit inquiries can hurt your credit score. Lenders make hard inquiries when you apply for credit, and those inquiries and accounts that you’ve recently opened make up 10 percent of your FICO score, and too many indicate increased risk and can be damaging.

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