Your credit report is a summary of your financial responsibility, and helps lenders decide if they will loan you money or not. It impacts everything from your mortgage rates and credit card approval odds to interest rates on loans you apply for. Your report consists of a high-level summary of how you’ve handled your credit accounts, your credit history, and an overall numeric credit score that reflects all the information in the report. Ranging from 300 (poor) to 800 (exceptional), your credit score is likely the aspect of your credit report that you’re most familiar with. But what goes into your credit score, and your overall repot, isn’t always clear. Fortunately, we’re here to shed some light on exactly what lenders are looking at when they pull your credit.
There are two major credit scoring companies in the U.S.: FICO® and VantageScore®. While both look at the same factors, only FICO shares how each is weighted in order of importance.
- Payment history: 35%
- Accounts owed: 30%
- Length of credit history: 15%
- New credit inquiries: 10%
- Credit mix: 10%
The five factors above are the most influential when it comes to your credit report. In this article, we’ll explain exactly how and why they’re important, and what you can do to improve your credit.
1. Payment History
Payment history has the largest influence on your credit report. This is because lenders want to make sure they can trust you to pay back the money that is loaned to you. Missing even one payment can have a negative effect on your credit report—and the later you pay, the greater the impact. Serious payment issues like bankruptcy, repossession, tax liens, collections, or foreclosures are extremely damaging. These derogatory marks will remain on your credit report for anywhere from 7-10 years, or up to 15 years in the case of unpaid tax liens, and make it very difficult for you to be approved for anything that requires good credit.
The best thing you can do for your credit report is to make your payments on time every month. Setting up autopay, calendar reminders, or other alerts can ensure you never miss a payment. If you find yourself struggling to keep enough funds in your account to cover all your bills at once, you can request a different payment due date that better aligns with when you get paid.
2. Accounts owned
Accounts owned is the second most important factor that goes into credit report. This measures how much debt you have in relation to how much credit you have available. Your accounts owned considers all forms of credit, including mortgages, credit cards, and installment loans.
Along with considering the amount you owe across the board, lenders also pay special attention to your credit utilization ratio. This is the relationship between the balance you owe on lines of credit and your total credit limit. Maxing out, or almost maxing out, your credit cards every month is a surefire way to lower your credit score through high credit utilization. For example, if you have a credit card with a $5,000 limit, and you spend $3,500 of that in a month, you’d have a credit utilization ratio of 70%, which is considered poor.
Most experts suggest using no more than 30% of your available credit per month. If you find yourself regularly using more than that, it may be time to inquire about a credit line increase. You can also get in the habit of paying off your credit cards every two weeks, rather than every month, to keep your utilization low.
3. Length of credit history
While it does not carry as much weight as payment history or accounts owned, the length of your credit history does play a significant role in your credit report. This is what lenders look at to determine how long you’ve been using credit, how old your accounts are, and what your general credit journey entails. They consider information such as:
- The age of your oldest account
- The age of your newest account
- The average age of all your accounts
- How recently you’ve opened a new account
A long credit history helps lenders see that you have experience with credit and can indicate that you’re a low-risk customer. The importance of your credit history is why it’s generally not recommended to close old credit accounts, even if you no longer use them. Opening new accounts can temporarily lower your credit score by lowering your average account age, but this effect will disappear over time.
If you have little to no credit history, there are always steps you can take to start building one. Many creditors offer cards designed for building credit. These secured cards usually require a deposit, but rarely have annual fees. As long as you establish a routine of paying your cards on time every month, you’ll be on your way to improving your credit history in no time.
Bank 34’s low rate personal cards feature no annual fee and a 25-day interest-free grace period on all purchases, so you can focus on growing your credit history.
4. New credit inquiries
Every time you apply for something that requires a credit check constitutes a new credit inquiry. There are two types of credit inquiries: hard and soft. The difference mainly boils down to the fact that hard inquiries can temporarily lower your credit score, while soft inquiries wont.
Hard inquiries, also called hard pulls, occur when a lender or credit card issuer checks your credit in order to make a lending decision. You will see hard inquiries reflected on your credit report, and you can dispute them if you feel they were conducted fraudulently or without your permission. Common hard inquiries include:
- Auto loan applications
- Mortgage applications
- Credit card applications
- Apartment rental applications
- Student loan applications
- Personal loan applications
Having several hard inquiries within a short period of time can negatively impact your credit score. In general, you can expect a hard inquiry to fall off your credit report within two years.
Soft inquiries, or soft pulls, occur when you or a company access your credit score for reasons unrelated to applying for credit. Unlike hard inquiries, soft inquiries cannot be viewed on your credit report. Soft inquiries include:
- Checking your credit score online
- Background checks
- Prequalified quotes and offers
5. Credit mix
The last factor lenders look at in your credit report is your credit mix. Ideally, lenders like to see a good mix of credit in the form of credit cards, installment loans, and mortgages. They also look at how many accounts you have across these types of credit. However, since this plays a small role in determining your overall credit score, it’s not recommended to open different types of credit solely for the purposes of improving your credit mix.
Trust Bank 34 for credit and banking expertise
From mortgage lending to credit cards, personal loans, and everything in between, Bank 34 is proud to offer our members a whole host of lending services. Whether you’re looking to build your credit with a Bank 34 credit card or want to apply for a loan, we offer a personal touch to ensure you have a great experience. While big banks rely on algorithms to make lending decisions, we take your unique circumstances into account to best fit your needs. Visit a Bank 34 location to open an account today.
Download Printable Version