If you’re trying to build your credit score, you first need to know the important factors that can affect it. Not all debts have an equal impact on credit, and that’s why we’ve broken down the top 5 factors that impact your credit score and why, to get you on the path to get accepted for your next loan!
Types of Debt
Revolving Credit
The most common example of revolving credit is credit cards. With this type of debt, you get a certain amount of credit to spend each month from your financial institution, and when the balance is paid off, your credit is available again. Having more than one revolving credit account can work well to diversify your credit report.
Installment Credit
Examples of installment credit are auto financing, mortgages, or student loans. These debts are a one-time lump sum that need to be paid off in a certain amount of time at a fixed interest rate. The faster you pay these off, the lower interest expenses you will pay.
Factors Impacting Your Credit Score
Knowing how revolving and installment credit is calculated is vital to understanding what impacts your credit score. Your credit score relies on:
1. Your Payment History (35%)
Your credit score is primarily built on your payment history. It is incredibly important to make payments on time because it shows that you are a responsible borrower. 35% of your credit score depends on this. Having a few late payments won’t significantly drop your credit score, but since your credit report goes back up to 7 years, if you miss payments often that can have a large impact.
2. Your Credit Utilization (30%)
Using a high percentage of your available credit might negatively impact your credit score. Using up all of your credit each month, for example on a credit card, may flag a lender that you are at risk of making a late payment. When getting approved for a loan, your chances might be reduced if you have multiple maxed out streams of credit. It is important to consistently manage your debts and have a lower credit utilization rate to prevent this.
3. Length of Credit History (15%)
Having a longer credit history looks good and reflects that you have more experience in managing and paying off your debts. This can be built with time, so be patient and you’ll get there!
4. New Credit (10%)
Keep in mind that applying for multiple types of credit in a short time period may lower your credit score. Lenders may see this as a sign of desperation and higher risk of not paying off the debt. Only apply for credit that you need and space it out appropriately.
5. Types of Credit in Use (10%)
Having a mix of credit types on your report that are managed responsibly positively influences your credit score. Balancing both installment and revolving credit enhances your creditworthiness and lenders view you as a trustworthy borrower.
Managing debt might seem scary, but with these tips you can become a credit expert! Keep a close eye on your payments and be smart with your borrowing to see the best impacts on your credit score. Birchwood is here to help you build good credit for your future and Birchwood Credit can help you start your auto financing journey today!
