Credit scores measure the level of risk a lender takes when they agree to do business with you. When you order your credit score, you will receive a list of the individual risk factors that are most impacting your scores currently. Some examples of these factors might be: late payments, high credit card balances, too few active accounts, or collections.
This list is designed to let you know exactly what elements in your credit history may be negatively impacting you so that you can make the necessary changes to improve your score.
Credit score risk factors
The risk factors most impacting a credit score will vary from one individual to another, and they may even vary from one month to the next. However, the two most important factors in every credit score are:
- Payment history — The most important factor in credit scoring is always whether you make all your payments on time. Although individual credit and financial situations may vary, missing payments is the biggest indicator of risk for a business trying to decide whether to approve you for credit or other services.
- Utilization Rate — This is the second most important factor in credit scores. Also called utilization ratio, it measures how much of your available credit you are currently using on your revolving accounts. The lower your utilization rate, the better for your credit scores.
Improving your credit score
If you have missed payments in the past or have currently delinquent accounts and want to increase your scores, the first step is to bring all accounts current and ensure that all payments are made on time going forward.
Although late payments remain on a credit report for seven years, the further in the past they occurred, the less they will affect you. In time, your more recent on-time payments will demonstrate that you are managing your credit responsibly, despite past credit troubles.
Next, review your credit card balances. If your risk factors indicate that your current credit card balances are too high, you can help increase your credit scores by paying down those balances.
Experts recommend keeping your utilization rate below 30 percent, but below 10 percent is best for credit scores. Ideally, you should pay your credit card balances in full each month. Doing so ensures that you won’t be spending money on interest or accumulating credit card debt.
Finally, review the list of unique risk factors provided to you with your credit score to see what specific changes you can make to build a stronger credit history and improve your credit scores even more going forward.
For more information about establishing and building your credit score, see the following articles: