Credit scores are extremely important because they affect your ability to borrow money as well as the cost of doing so. Plus, bad credit can even make it difficult to find a job or a place to live.There are five categories of credit score. If you have good marks in each of these categories, your credit should be good no matter what score is used.
Payment history (Most important): If you will ask any of the lenders/Creditors about how to improve credit score then their first advice will always be the same that you need to make timely payments on whatever line of credit you have availed of. Having a long history of on-time payments is best for your credit scores while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid. So a 30-day late payment might have a lesser effect than a 60- or 90-day late payment. Therefore, the first and the foremost rule that you must keep in mind while availing of any type of credit is that it is mandatory to make payments on or before the stipulated date. This is half the job done and will help you increase credit score in the long run.
Credit Utilization Ratio (Very Important): The money you owe lenders accounts for at least 30% of your score. It’s an indicator of whether your spending habits are sustainable and if you’re likely to face serious financial problems in the future. Ideally, credit utilization ratio shouldn’t exceed 30% to have a good credit score.
Credit Utilization Ratio = Credit borrowed/Credit Limit
Age of credit (Somewhat Important): Did you know that your oldest credit account can help you keep your credit score high? This is because the age of credit or credit history is a factor that influences your credit score. The longer your credit history the better your chances of enhancing your credit score. So, even if you are not using a credit account that you had opened long back, do not make the mistake of closing it. Also, this is the best way to decrease your credit utilization because credit bureaus calculate credit utilization ratio on total available credit limit with multiple lenders.
Types of credit (Somewhat Important): This category measures how many different types of credit accounts you’ve used and how recently you’ve used them. For example, some common types of accounts include credit cards, personal loans, retail lines of credit, auto loans and mortgages. In general, the types of credit you’ve used show how well-rounded of a borrower you are.
Recent Credit (Less Important): Creditors want to know whether you’re desperate for additional credit. That’s a red flag for a high-risk borrower. So don’t apply at multiple lenders at once if you are already having a big line of credit in your affordable range. Every time you apply for a credit, lenders check your credit history to quantify the risk of lending you the money and every hard inquiry is recorded on your credit report.