Cracking the Credit Score Code

Ah, the credit score. 

That pesky little number that seems to hold all the power when it comes to getting a loan.

Credit scores are like the report cards of the financial world. They give lenders a quick snapshot of how responsible you are with money. And just like a report card, your credit score is affected by a variety of factors. It can make or break your ability to get approved, and even determine the interest rate you’ll pay. So, what exactly goes into this mysterious credit score? Let’s break it down.

What is a Credit Score?

Simply put, a credit score is a number that ranges from 300 to 850, and it’s based on your credit history. Your credit history includes things like how much debt you have, how much credit you have available, how long you’ve had credit accounts, and whether you’ve paid your bills on time. 

The higher your score, the better your credit.

Think of your credit score as a financial mood ring. It changes colours based on your financial behaviour and gives lenders a quick snapshot of your creditworthiness. But unlike a mood ring, you can't just shake your credit score to make it change. It takes time and effort to build and maintain a good score.

So, what factors impact your credit score? 

Payment History

Let's start with payment history. This is the most important factor, and it makes up 35% of your score. If you consistently pay your bills on time, your score will be in good shape. On the other hand, if you’re frequently late on payments, your score will take a hit. If you're looking to take out a loan, lenders want to know that you're reliable when it comes to paying back what you owe.

Credit Utilisation

The second factor is credit utilisation. This is the amount of credit you’re using compared to the amount you have available. Think of it like going to an all-you-can-eat buffet. Just because you can eat all the crab legs you want, doesn’t mean you should. 

If you have a credit card with a $5,000 limit and you’ve charged $4,000, your credit utilisation is 80%. Ideally, you want to keep your credit utilisation below 30%. Lenders want to see that you’re not maxing out your credit cards or taking on too much debt.

Credit History

The third factor is length of credit history, which makes up 15% of your score. This factor looks at how long you’ve had credit accounts, and how active they are. If you’ve had credit accounts for a long time and you use them regularly, this is a positive factor for your score. If you’re new to credit or you have a sparse credit history, this can hurt your score.

Credit Mix

The fourth factor is credit mix, which makes up 10% of your score. This factor looks at the types of credit accounts you have, such as credit cards, loans, and mortgages. If you have a mix of different types of credit, this can be a positive factor for your score. It shows lenders that you’re able to handle different types of debt responsibly.

New Credit

The final factor is new credit, which also makes up 10% of your score. This factor looks at how many new credit accounts you’ve opened recently. If you’ve opened a lot of new accounts in a short amount of time, this can be a red flag for lenders. It can indicate that you’re taking on more debt than you can handle.

In the end, the more you know about your credit score and how it works, the better equipped you’ll be to make smart financial decisions. And if you ever find yourself struggling with debt or other financial challenges, remember that there are resources available to help, like credit counselling and debt management programs. With a little bit of effort and education, you can take control of your credit score and your financial future.