The first time you get a bill in your name or finance your first car, congratulations! You’ve just created a credit report for yourself. This can be a little overwhelming at first, knowing that your credit report is like your financial “finger print.” It is tied to you and encases all of your credit history, no matter if it is good or bad.
There is good news though. With careful spending and budgeting, you can maintain a healthy credit score and stellar credit report. Just keep these key thoughts in mind when making decisions about your credit, because you could endure negative effects if not careful.
There are 6 issues that affect your credit score negatively:
- Late or missed payments
- Using more than 80 percent of your total amount of available credit
- Liens or foreclosures
- Periods of unemployment
- Too many requests for new lines of credit
If at all possible, do not let your credit fall victim to any of the above issues or situations. Your credit report will face a tough mountain to climb in order to get out of negative status. To have an even deeper understanding of the impact of credit let’s break a few areas of your credit history down that affect your credit score.
Your Payment History – 35%
Payment history accounts for a whopping 35% of your credit score. This makes sense considering that your credit report is comprised of the creditors you have and how you pay them. If you have a long and positive payment history then you will be considered a “safe” bet for creditors to extend credit to when you apply for credit. Unfortunately, the opposite is true if you have a history of making spotty, late, and missed payments to your creditors. They will see you as unreliable and a poor risk. Very few credit opportunities will be awarded to you with a weak payment history.
How Much You Currently Owe – 30%
The key to understanding this area of how your credit report is weighted, is to think about your credit (charged, financed), versus your available credit. So for example, if you have a credit limit of $6,000 for a major credit card, and you have charged only $1,500, then you have only reached 25% of your available credit limit, and that is noted as a positive on your credit report. However, if you have that same credit limit and have racked up $5,000 in charges, then you have reached 80% of your credit limit. The magic percentage to have as credit debt versus credit limit is 30 percent. Once you go over that threshold, creditors will be weary to extend you credit because it will be challenging for you to repay comfortably more than 30% of your debt. So, work to stay under that 30% to maintain a healthy credit score in this category.
How Long Have You Had Credit – 15%
The length of time that you have had credit can strengthen your credit score, considering that it is a positive history. That is because if you have had a credit card for say, five years, and have never missed a payment, then that will contribute to having a positive credit score. Creditors will see you as reliable, versus someone that misses payments or that has not had credit for very long, will be assessed to being a poor risk for extending credit.
Your Last Application for Credit – 10%
You do not want to have too many credit applications and inquiries on your credit. Potential creditors will view this as a “need” for money and make them apprehensive to loan money or extend credit to you. Remember to not authorize random creditors to run your credit, or apply for credit more than every two years or so. Doing do will ensure that this category of your credit report remains in the positive zone.
The Types of Credit You Are Using – 10%
If you have credit then there are two types of credit that you have, installment and revolving. Installment loans are items such as car loans and mortgages. Revolving credit are credit cards that you pay in full monthly.
In conclusion, there are several factors involved that affect your credit score. Keep all of these areas and issues in mind when making future decisions about your credit activity. Use this little checklist as a guide for understanding and protecting your credit score.