When you’re rebuilding your credit history – after a financial hiccup, after bankruptcy – or if you’re building it for the first time when you’re just starting out, it’s important to understand how the credit score is calculated and how you can impact the components that make up the calculation. One of the most important aspects of your credit report and the data in the report that’s used to calculate your credit score is your payment history. Payment history is the largest single component of your credit score and so it’s critical to manage this effectively. The good news is it’s something entirely under your control. Here’s what you need to know.
What Are the Components of a Credit Score?
Your credit report is a track record of all your financial activity from creditors that report to the bureaus including your car loan, mortgage, credit cards, and other types of loans. Also, some types of debt that don’t report monthly to the credit bureaus, such as utility providers, doctors’ offices, and rental agencies, will report if you go delinquent and the debt goes into collections. But as a rule, month to month, if you’re paying on time, only auto loans, credit cards, mortgage, student loans, and similar creditors report to the bureaus.
This data is collated and used to calculate your credit score. Your credit score is calculated upon request, such as when a creditor checks your credit to assess whether they want to issue you a credit card or grant you a loan. You might also see monthly credit scores thanks to a subscription service or from a credit card issuer as part of your monthly service. Although the calculation formulas themselves are proprietary and not made public, when calculating credit scores, these are the five components:
- Payment history makes up 35%
- Credit utilization makes up 30%
- Length of payment history makes up 15%
- Mix of credit makes up 10%
- New credit also makes up 10%
What Do the Other Components Mean?
We’ll talk more about payment history in a moment, but here’s a quick rundown of what the other terms mean. Credit utilization is the percentage of your available revolving credit (i.e., credit cards and similar) that you’re using. Length of payment history is also known as "average age of accounts" and reflects how long you’ve been using credit, on average. The mix of credit reveals whether you have only revolving credit or also have installment credit (i.e., mortgage, auto loans, etc.). Finally, new credit indicates if you’ve recently opened any new accounts.
Payment History Is the Big-Ticket Item
Because it represents 35% of your credit score calculation, payment history is very important to monitor and maintain. Your payment history tells a potential lender whether you pay your bills on time and whether you do so consistently. There are some critical things to know about this aspect of your credit score. First, missing even one payment is a big deal. Second, consistently missing payments can kill your credit score. If you miss payments regularly, creditors will see you as irresponsible about meeting financial obligations and will assess you as a poor credit risk.
If You Must Pay Late, Pick and Choose Carefully
Sometimes, life gets away from you and you might run short on cash one month. If you can’t meet all your obligations, choosing wisely what you pay on time versus late could protect your credit score. For instance, if you pay a credit card late, that will report to the credit bureaus that month and drop your score. However, if you pay your electric bill a few days late, it likely won’t report. Of course, you don’t want your lights turned off but knowing which bills report to the bureaus can help you make savvy decisions when your finances hit a speedbump.
To find out more about establishing or rebuilding your credit after bankruptcy, contact Credit Score Keys. Call 919-495-2365 today for a free consultation.