This is my actual Payment History from Credit Karma.
- Payment history (35%)
- Amounts Owed (35%)
- Length of Credit History (15%)
- Types of Credit Used (10%)
- New Credit (10%)
Payment History: Not all payments you make on time will help increase your credit score but late payments can affect your score. This is the most common reason why people have bad credit. Your payment history makes up the majority of your credit score. One of the easiest ways to start building healthy credit is to make on-time payments. If you cannot make a payment on a specific due date then you should contact your lender or credit card company to work out a date that works better for both parties. The worse thing you can do is consistently make late payments.
Amounts Owed: Credit card utilization. You should never use 30% of your credit card. For example, if your credit limit is $2500, then each month you’ll want to have a balance of no more than $750 that you carry over. Personally, what I’ve done in the past was used more than 30% of my card but paid the balance down before my credit card due date. By the time it was reported to the credit bureau, it looked as if I used less than 30% of my credit limit for that month.
Length of Credit History: Suppose you have a credit card that has a low credit limit and no rewards, you’ll want to keep that open and active, because it counts as your longest running line of credit. Never close a credit card just use it and pay down the balance. Length of credit history makes up 15% of your credit history. Using older lines of credit will help you build healthy credit. I have one credit card that I use for now but my older credit cards are still open.
Types of Credit Used: Having just a credit card isn’t enough to build up your credit. You’ll need different types of credit. Lenders want to see that you have experience using different types of credit such as Revolving credit lines (credit card) and Installment credit (car note). Revolving credit lines only require a minimum payment each month, but installment credit lines have a specific payment amount, payment date, and term length. By making a pre-determine on-time payment amount by a specific due date each month and for a specific amount of time, then you’re showing lenders that you can be trusted to use riskier financial products like a mortgage. My credit line increased tremendously when I had a car note.
New Credit: New Credit makes up 10% of your credit score. Make sure that when you apply for new credit that you only apply for one line preferably once a year, but if necessary then once every 6 – 9 months. When applying for new credit, a hard credit pull is instigated on your credit. The hard pull hurts your credit score and drops it a few points, which is normal. However, when you apply for too much credit at one time, your score can be seriously affected. Therefore, do your best to make sure you only apply for new credit if necessary.
*Building excellent credit takes time but as long as you’re taking steps in the right direction, it’ll definitely happen for you in no time. The good thing is, you now know the 5 components of a credit score.