The Makings of a Credit Score and How You Can Maintain a High Rating

If your credit score happens to be a 700 or higher – a congratulations is in order. Whether you’ve always maintained a pretty decent score or you’ve worked your way from the bottom up, having a score in that range certainly deserves a pat on the back. 

However, what you may not be aware of is that your actions as it pertains to your personal finances can significantly affect your credit score. Reverting to poor credit habits can cause your score to plummet in an instant. To prevent this from happening, it is best to learn effective credit management tips that will help you keep your score within a decent range.

What Makes a Credit Score?

When learning to improve and/or maintain your credit rating, it is a good idea to first understand how your score is calculated. Knowing what causes your credit rating to rise or drop can prevent you from making poor decisions as it pertains to your personal finances. Below is a breakdown of how your credit score is determined.

  1. Payment History

Accounting for about 35% of your calculated credit score is your payment history. Each of your credit accounts is taken into consideration. They look at how many accounts you have and how effective you are in repaying those balances. Therefore, the first and most obvious way to maintain a high credit score would be to make timely payments (at or above minimum amount). Positive payments over the course of time can increase your credit score significantly.

  1. Amounts Owed

Coming in at 30% of your overall credit score is the amount of money you owe on each account. According to MyFICO.com, the amounted owed is often referred to as a utilization ratio. The utilization ratio is essentially the percentage of credit used in relation to how much is available. So if you have a credit account totaling $5,000 and you’ve used $1250, the utilization ratio would be 25%. This ratio is determined based on individual credit accounts and also calculated as a whole. It is a good idea to keep your utilization ratios low to prevent a drop in your credit score.

  1. New Credit

Be careful when considering the possibility of requesting any new lines of credit. Whether you want a new credit card or you’re applying for an auto loan, new accounts can account for about 10% of your credit score. Each time you put in a new application, the lender will review your credit history to determine whether you’re eligible to receive funds. Each time they check your credit report, it is counted as an inquiry. Too many inquiries on the report can drop your credit score. Credit repair companies such as CreditRepair.com suggest that you limit the amount of applications you complete.

  1. Types of Credit

Another 10% of your credit score is determined by the types of credit that you have. If you want to maintain a decent score, you’ll want to diversify your credit accounts. When calculating your credit score, the types of accounts you have are taken into consideration. A mixture of credit card accounts, retail accounts, installment loans, and mortgage loans shows that you’re responsible enough to handle an array of credit accounts.

  1. Length of Credit Accounts/History

The longer your credit history is, the higher your credit score stands to be. The length of your credit accounts and history totals 15% of your score. When calculating your credit score in relation to the length of accounts and history, there are various factors taken into consideration; how long you’ve had each individual account, how long you’ve been using those accounts, and the ages of your oldest and newest account. This is why credit experts strongly recommend you rethink closing out or opening too many accounts.

Staying on top of your credit rating is an essential part of securing your financial future. Continue to educate yourself on the various credit management practices that will help to improve your overall rating. These five factors are a great start and are the most important aspects to keep in mind as you strive to maintain a high credit score. By watching the amount of credit you use, paying your accounts on time, spacing out your new credit applications, and diversifying your credit accounts, your credit score will improve significantly.

Author: Kar

Dr. Kar works in the interface of digital transformation and data science for business management domains. Professionally a professor (IIT, IIM) and an alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is a Regular Contributor of Business Fundas and a blogging addict. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.