In part one of this two-part series on credit scores, I provided some basics about credit scores, including a definition and some background on the credit bureaus and the methods they use to calculate your credit score (click here to read part 1).
Now let’s dig deeper and explore some of the ways your credit score can be impacted either positively or negatively, and the main reasons why building and maintaining a good credit score is important.
What affects your credit score?
There are many factors and combinations of factors that can alter your credit score for better or for worse; I’m going to mention a few key factors that typically have the greatest impact.
As a general rule, the single biggest factor that can have the greatest impact on a credit score is a mortgage. The ability of an individual to obtain a mortgage and then effectively manage that mortgage by making timely payments on a consistent, long-term basis carries a lot of weight in credit bureau calculations. On the flipside, a credit history sprinkled with late or missed mortgage payments will be reflected by a low credit score and an unfavorable credit rating. The credit bureaus consider individuals that fail to pay a mortgage on time as a major risk. The bureaus assume that a missed mortgage payment is a strong indicator that the homeowner is either unwilling or unable to make payments on time – and they consider either reason risky. For those who do not have a mortgage, keep in mind that late and missed rental payments may also be reported to the credit bureaus and negatively impact credit histories and scores.
Beyond housing, virtually any late or missed payment for any debt owed can be reported and drive your credit score down. Credit card balances, medical bills, cable, phone, Internet, utilities … if you owe money and fail to pay on time your credit score can be hammered. The credit bureau algorithms also incorporate the number of open trade lines you have, the total amount of open credit, and the overall amount of your collective debts. There is no hard and fast rule about the optimum number of trade lines to have open because everyone’s financial profile is unique, but too many or too few open trade lines can decrease your credit score. A balance, which suggests smart money management, is the ideal target.
Credit score tips
As I mentioned in Part 1 of this series, a perfect credit score is unattainable. However, here are a few tips that can help you protect your credit score from damage:
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