There was a time when credit was accessible only to the elites. Thanks to credit scores, now everyone has access to credit. So exactly how does a credit score work and how to build a good credit score. There are many credit scores available through various credit bureaus. FICO is one popular score. There are credit models which determine the credit score of an individual. In simple words, it is a weighted average of multiple credit-related attributes. You can improve your credit score by understanding these factors.
- Payments: It has the highest weightage on your credit score. If you miss a payment on any type of auto, personal loan or mortgage, the financial institution will report it to the bureau. One missed payment may not impact the score significantly but if there are recurring missed payments then the score will get impacted. So, pay your monthly statement balances on time.
- Credit utilization: Credit utilization is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. Using more than 30% of your available credit is a negative to creditors.
- Total accounts: This is an indicator of total available credit.
- The average length of credit: Credit score is higher for longer credit history. Length of credit the age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts.
- Inquiries: there are 2 types of inquiries: hard inquiry and a soft inquiry. Hard inquiries negatively impact the credit score. When you apply for new credit, the financial institution will make a hard inquiry on the bureau to fetch the latest credit report.
Pro-tip to quickly build a credit score: You can piggyback on someone with a good credit score and increase your credit score. For this, the primary person will need to add you as an authorized user and you can see your score increase fast.
