With the holiday spending behind us, bills are upon us. It may be a good idea to take a look at your credit score and what affects it. Tracking your credit score protects you from identity theft and allows you to stop any inconsistencies that may come up. 

So what determines your credit score? 

Your credit score is affected by your financial steps and is tracked, then compiled into your credit report. This essentially is an outline of your credit activities — from borrowing and charging, to repayment on any loans you may have. 

There will also be any actions taken due to unpaid loans.

 

Factors to consider

Beside financial information, a credit report contains personal details that lenders update, such as your name, address (current and previous), telephone number, date of birth, Social Security Number and employer.

Your credit report contains information that is used to determine your credit score. One of the most important factors in determining your credit score is your payment history, which accounts for approximately 35 percent of your credit score. 

The summary of your payment history encompasses payments on past and current debts and details all of your reported credit accounts, including if payments were on time, late (including the number of days late) or not made at all. Since your credit score influences whether you are able to buy a home and get a job, it is extremely important to protect your score by making loan and bill payments on time and by not taking on more debt than you can handle.

Another important factor in calculating your credit score (about 30 percent) is your amount of debt (termed your credit utilization). This is more than a total of all debt you owe; it also includes the number of reported accounts with outstanding balances and how much available credit you’ve used. 

For revolving credit such as credit cards, your credit utilization is an aggregate of the total balances divided by the total limits. For example, if you’ve charged $2,500 of debt to a credit card with a limit of $5,000, you have a credit utilization ratio of 50 percent. Your credit score will suffer if your credit utilization ratio is high.

Your credit score also takes into account the number of years you’ve used the credit. This factor isn’t weighted as heavily — it tends to be about 15 percent of your credit score — but it shows that establishing good credit early is wise because a longer credit history can positively impact your credit score. A high score may still be possible with a short credit history if you have used the credit responsibly.

The final and least-weighted factors are new credit and what is loosely referred to as “other factors.” Although both account for just around 10 percent of your credit score, they should not be treated lightly. 

An example of new credit is transferring a credit-card balance to a card with a lower annual percentage rate or opening new merchandise credit cards to receive a percentage off your total purchase at your favorite retailer. These activities in isolation won’t do any harm, but if there are multiple inquiries for new credit in a short timeframe (within the last six months), they can collectively cause a short-term drop in your credit score. 

The “other factors” category includes having a mixture of credit types, such as credit cards, auto loans and home mortgages. Diversifying your credit is good for your credit score and common for those with long credit histories.

It’s important to note that your credit score is not based on factors such as race, gender, marital status, religion, age, salary, employment or where you live.

 

Check it periodically

Understanding your credit report is the first step to financial success. It’s a good idea to also monitor your credit report periodically, which you can do by receiving a free yearly credit report at annualcreditreport.com.

To keep a good credit score, make sure to check it at least once a year to keep a good credit score and allow probable lenders to see that you pay your loans. 

 

EMILY WANG HAWKINS is a State Farm agent in Madison Park. To suggest future topics or more information, visit www.myagentemily.com, or call (206) 588-0416.