Your credit score can be vitally important to your life as it affects many of your financial capabilities.
Used by lenders to ascertain how much of a risk you are, credit scores help them decide whether or not they want to offer you a loan and what interest rate you would be given. In order to make sure your credit score is the best it can be you need to understand how the score is composed and what things you might be unwittingly doing to hurt it. Firstly, it's important to know that you have multiple different credit scores dependent upon what information has been provided to the different scoring agencies and how they use that information. While this might seem complicated, it is still possible to garner some understanding of how scores are produced. FICO, who are the most widely used source for credit scores, have shared the percentages of how they break down five different categories that help to create your credit scores:
35% - Payment History
The most heavily weighted, and therefore most important, category is your payment history. This simply comes down to whether or not you've been paying your bills on time. Ensuring that you always pay your bills by the due date and that you aren't ignoring medical or utility bills is a simple way to make sure you aren't hurting your credit score.
30% - Amount Owed
The second highest weighted category is your "utilization ratio" or how much you owe compared with how much credit you are allowed. If you are close to coming to the limit or have maxed out many of your credit lines this will damage your credit score as lenders will think you aren't responsible enough to have multiple lines of credit. Make sure you keep the amount you owe much lower than the amount you can take out, and think twice before closing credit cards as this could negatively impact your score by lowering the amount of credit you have available to you.
15% - Length of History
Starting to build credit as soon as you can will help raise your credit score as 15% of your score is decided by how long you've had credit. How long you've had accounts open and when those accounts were last used make up this portion of your score. If you've been using a credit line for a long period of time really consider how it might negatively impact your credit score if you're thinking about closing it.
10% - New Credit
How many new credit lines you've opened recently can impact your credit score. If you've opened too many at once lenders will suspect that you might not be able to handle all of the payments. While it only counts for 10% of your calculated score, it's best to spread out opening new credit lines over a number of months, so you don't appear to be as much of a risk.
10% - Types of Credit Used
How many different types of credit you have makes up the last category of your score. Proving you are responsible enough to handle multiple varieties of credit looks good to lenders, so, while you don't need to actively pursue a line of credit in each category, having a mixture of installment loans, mortgage loans, bank credit cards, or retail credit cards can help give your credit a boost.
Armed with this information you can make sure that you're not doing anything to accidentally damage your credit score. Even with the other categories in mind, remember that the most important thing you can always do is pay your bills on time.