Your credit score is very important; it will help determine the type of loan you get—or if you get a loan at all—for big purchases like a house or car. But what actually determines your credit score?
- Credit Card Usage: How you use your credit card helps determine your credit score. The utilization rate is essentially how much available credit you have been awarded and how much you actually use. If you have a $1,000 credit limit on a card and only use $300 (30%) each month—and regularly pay it off—you are actively working on building strong credit.
- Payment History: Late bills and payments will negatively affect your credit score, but if you regularly make your payments on time, this will help improve your credit score.
- Number of Open Lines of Credit: Improving credit can be confusing. Creditors want you to have a robust history of credit, meaning they like to see several open lines of credit. But that doesn’t mean they want you to open ten credit cards and never pay them off. Instead, they want to see a balanced and maintained credit history, with perhaps a couple credit cards, student loans, an auto loan, and a mortgage, all of which are regularly paid.