5 Components You’ll Find in Your Credit Report
When you get a credit report, you’ll find tons of information about your borrowing habits that can be difficult to understand. The process of credit scoring and how your credit score is determined is somewhat unknown to the public. Unless you work for a credit bureau, you’ll likely never know or understand the algorithm that determines whether you’re a borrower with low risk.
The two largest credit scoring model creators in the US are FICO and VantageScore. They provide borrowers with a look at the different types of things that can affect credit scores. Once you understand how your actions influence your scores, you can improve your credit score and get the best rates on loans.
In this article we will focus on VantageScore as it is the scoring model also used in consumer credit reports. Many of the components we’ll discuss cross over into FICO, so make sure to read everything so that you can understand your credit score fully.
5 Factors That Affect Your Credit Score
The credit score you receive is based on information found in credit reports. Your credit score score is influenced by five categories:
- Payment History
- Amounts Owed
- Length of Credit History
- Types of Credit Used
- New Credit
They each influence your score in different ways. Payment History influences your score the most, followed by Amounts Owed and so on.
We’ll discuss the percentage of each factor and just how much it affects your VantageScore credit score.
Your Payment History impacts your credit score the most. The purpose of a credit score for lenders is to determine whether or not you are likely to make your monthly payments on time. If you have a history of paying your bills late, then lenders believe that you’ll continue to make late payments. If your risk is higher, your credit score will be lower.
A lower credit score means that you’ll likely be offered the loan or credit card but with a higher interest rate. In some cases, if your credit score is low because of a history of late payments, you won’t be able to get a loan, mortgage, or particular credit card.
A good credit score suggests to lenders that you pose less risk, which means you’ll have lower interest rates, ultimately paying less on the loan in the long run.
All three of the major credit bureaus – Equifax, TransUnion, and Experian – receive updates about your payment history from credit card companies, lenders, and collection agencies.
Length of Credit History
VantageScore does not take your age into account when calculating your score. However, the age of your accounts does matter as the length of credit history has the second highest impact on your credit score.
Lenders see those with longer credit histories as less risk because they have more data to use when determining ideal borrowers. With more information, the results of the scoring are more effective, which can help lenders make important decisions.
While length of credit history is a large portion of your credit score, it’s important to remember that if you’re new to credit cards and are just starting to build your score, paying your bills on time is the best way to increase your score.
There are a few factors that are considered when it comes to the length of credit history, including:
- The average age of the accounts
- The age of your oldest and newest lines of credit
- How long the accounts have been open
- The length of time since you used each account
Opening too many new accounts at one time can lower your average age of credit. You should also avoid closing old accounts if possible.
Apart from accounts in collections, those accounts can build your credit score. However, you’ll need to manage your credit carefully. Late payments can always hurt your score.
Amounts Owed is another of the most significant parts of your credit score. Amounts Owed is the amount of debt you carry, including credit card debt, student loans, and more.
What you need to know about amounts owed is the term credit utilization. Your credit utilization is the amount of available credit you have each month on revolving credit accounts, like credit cards. The more of your credit you use each month, the higher the credit utilization ratio gets, and the lower your score will be.
For example, if you have a credit card with a $500 credit limit and have used $400 of it, your credit utilization ratio is 80%. In order to improve your credit score, you should aim for low utilization rates of 10% or less.
One way to do this is by paying off your credit cards online as often as possible instead of waiting for that monthly bill to come in the mail.
Types of Credit Used
There are different kinds of credit out there and it’s important to have a mixture of account types on your credit report.
This model rewards you for having a mixture of different accounts such as credit cards, an auto loan, and a mortgage because it demonstrates that you are paying on-time with all types of loans.
The collective term for the types of credit used is the credit mix. While it’s not the most important component of your score, you can still earn points over time in this category.
New Credit makes up the final portion of your credit score. Having too many new accounts in a short period can hurt your credit score. When a lender requests a copy of your credit report, that record of access is added to your credit report in the form of an inquiry.
There are two different types of inquiries; soft and hard.
A soft inquiry won’t hurt your credit report, but a hard inquiry can lower your score for a short while. Hard inquiries take place when you apply for a loan or credit card, and the lender pulls your credit report.
The number of hard inquiries that appear on your report within the last 12 months is taken into account to determine your score. Too many recent inquiries demonstrate that you’re in financial distress, which can cause your score to decline.
If you’re planning on buying a house, it’s best to avoid too many hard inquiries in the few months leading up to looking for a mortgage so that your score is at its highest.
Check Your Credit Report Online
Now that you know everything there is to know about your credit report and what factors are important, you can find your credit report online and begin taking steps to improve your credit score.