Your credit score is one of the largest contributors toward your loan approval. This three digit number is compiled with information from your credit profile factors in various attributes from your credit history. What can improve or damage your scores? The most important piece to the puzzle is your payment history. Accounting for 35% of your score looks at when you've made payments to your credit accounts. Paying when due will gradually increase your score yet paying more than 30 days past the due date will decrease that same score.
The next contributor accounts for 30% of your score and compares the amounts owed with the credit limit. You can already tell that just these two factors make up nearly two-thirds of your total score. By concentrating on these two areas alone will keep credit scores on the rise. But there may be a couple of misconceptions about the impact of account balances. These two concern the balance in its entirety. Is it better for your scores if you pay your credit accounts down to zero each month after using credit or is it better to carry a balance? The answer might surprise you.
At first glance it would appear paying down balances all the way each billing period would help credit scores the most. But that's not completely true. By carrying a running balance of approximately 30% of your credit limits your credit scores will in fact be positively affected. That simply means if your credit limit is $10,000 then a balance of $3,333 (or something close, anyway) your scores will rise. Scores want to see you not just keep a running balance but actually use credit and show a payment history. If you think about it, how would these scores calculate if you don't both use credit on a regular basis but also make timely payments?
Note here, that keeping a balance also means paying additional interest, so the amount of interest owed compared to increasing your credit scores overall should be evaluated. If you already have good credit and you want to avoid paying interest charges, you should indeed think about paying off these balances when able. If you want to improve your scores, use credit regularly and pay when due. When your scores reach your credit score goal, at that point paying off balances entirely is a wise decision, that is if you can readily afford it. If you don't pay the balance when due, interest is then calculated on that balance and added to the total amount due. That's interest being paid on interest.
There are three other factors regarding credit scores but they only make up 1/3 of your total score. How long you've been using credit makes up 15% while looks at the number of recent accounts being opened represents a 10% contribution. Finally, inquiries initiated by the consumer for new credit accounts for the final 10%.
If you're looking to improve your scores, the last three not only matter much less than payment history and utilization and there's really not much you can do about them. However, making timely payments with an eye on your balances and your scores will gradually continue to rise.
