What Really Influences Your Credit Score?

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Credit Report
Your credit report is essentially your financial report card. It serves as a way for banks, insurance and lending companies to gauge your credit-worthiness and whether you’re likely to miss payments or default on a loan. It’s also common for landlords, employers and government agencies to check your credit before approving an application or confirming a transaction.

But, do you know where the information on your credit report comes from and how it impacts your overall credit score? It might help to know the next time you’re tempted to take out another credit card or just pay the minimum on your balance.

Here are the five most important things that make up your credit score:

Payment history: 31 percent

Paying your bills on time helps you avoid late fees and also helps your credit score. A good payment history shows lenders you have a record of paying on time. And the longer you have that, the better. Late or missing payments negatively affect your score, as do any collections, foreclosures or bankruptcies. Payment history usually pulls the most weight in your credit score calculation, so it’s important to stay current in this category.

Level of debt: 30 percent

It’s not a good idea to use up all your credit. By using most of your credit, or getting close to your credit limit, you can negatively impact your score. A good policy is to keep your credit card balance within 30 percent of your limit. In other words, if your credit card limit is $5,000, charging more than $1,500 can be risky even if you pay off the balance on time. Keeping your debt low shows lenders that you’re likely able to afford monthly payments and possibly take on more expenses.

Length of credit history: 15 percent

How well have you managed your credit accounts over time? Having a longer credit history helps your score. Lenders want to see that you’ve kept a good track record over a long period because someone with little or no credit history is more financially risky because it presents more of an unknown. This means that keeping that credit card you’ve had for a while open can help your credit (as long as you keep the balance low or at zero by paying on time every month).

Types of credit: 14 percent

Showing that you have a record of paying different types of debt helps your credit score. And different types of credit or loans can impact your score more or less. A healthy mix of credit includes credit cards, home loans and auto loans. Credit consisting of only one type, such as credit card accounts, won’t help your score, so diversity is important when it comes to credit accounts.

New credit: 10 percent

Having lots of credit inquiries within a short time lowers your score because it shows you’re actively searching for more credit, which makes lenders nervous. However, when you check your own credit or when an employer does, it won’t impact your score.

The major components of your credit score consist of your payment history and amount of debt. By knowing how the items in your credit report are weighted, you’ll have a better idea of the factors impacting your score.

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Written by Becky Frost, Senior Manager of Consumer Education for Experian Consumer Services. Experian Consumer Services offers credit monitoring products like freecreditscore.com™, which has resources and calculators that help you understand how credit can impact your life. Credit is an important component when buying, renting or refinancing your home.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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