What Factors are Used to Calculate Credit Scores
Below is a MRR and PLR article in category Master Series -> subcategory Personal Finance.
Key Factors in Calculating Credit Scores
In the US, your credit score holds great significance. A good score can open doors, while a poor one can close them. Essentially, your credit score represents the risk a lender takes when offering you a loan, and it determines the size of the loan you can receive. So, what factors influence your credit score?
1. Payment History (35%): This is the most significant factor. It records all your payments to creditors. Even minor late payments can negatively impact your score, while defaults or missed payments leave a larger mark. Negative marks remain on your credit report for seven years, regardless of whether the debt is paid off.
2. Credit Card Utilization (30%): This ratio compares your available credit to what you're currently using. A lower utilization is better for your score. Contrary to what some may think, closing a paid-off account can decrease your score. The ideal strategy is to keep several accounts open and utilize only a small portion of your available credit.
3. Length of Credit History (15%): The duration of your credit usage matters. From a lender's perspective, a long credit history, even with a few blemishes, is preferable to a brief spotless one. Encouraging young adults to responsibly start building credit early can be advantageous.
4. Credit Mix (10%): A diverse credit portfolio can improve your score. Having different types of debt, such as credit cards, mortgages, and car loans, is viewed positively by lenders.
5. Stability: Though not a direct factor in the score, your job stability and residential history matter. Being in the same job and residence for over three years is often seen as a sign of stability.
Understanding these factors is crucial. It empowers you to take actionable steps to improve your credit, either by establishing good credit habits or enhancing your current score.
You can find the original non-AI version of this article here: What Factors are Used to Calculate Credit Scores.
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