It Takes More Than Timely Payments to Build Good Credit

We know that paying bills on time is one of the most important aspects of being financially responsible. If you pay late, you’ll get charged a late fee, you risk having your services terminated (no one wants to be in the dark!), and your credit could be impacted. While payment history is generally the most important factor influencing your credit score, it’s not the only thing that matters. In fact, you could pay on time every single month and still not have a perfect credit score.

Besides payment history, there are four other major factors that affect your credit score: level of debt, age of credit history, mix of credit, and recent applications for credit. With that said, here are some things that could be affecting your credit score.

You could have a lot of debt. Credit scores are better when you have a low amount of debt, especially a low ratio of credit card balances to their credit limits. Similarly, the lower your loan balances are compared to the original loan amount, the better it is for your credit score. If your credit cards are at or near maxed out, your credit score is affected. Even if you charged a lot but paid it off when the bill came, your credit score could still take a hit, particularly if your card issuer reported the balance to the credit bureau before you made a payment.

You haven’t had credit that long or you’ve opened new accounts recently. The older your credit history, the better your credit score will be. Credit scores look at age of your oldest account and the average age of all your accounts to decide the “age” of your credit history. If you haven’t had credit that long or you’ve recently opened several accounts, your credit score could suffer. Fortunately, your credit score can rebound from the hit, assuming you don’t continue opening new accounts.

You may only have experience with one or two types of accounts. Mix of accounts isn’t a big factor in your credit score, but it can come into play when you have a shorter credit history. Your credit score is higher when you have both installment accounts (loans) and revolving accounts (credit cards) on your credit report. And, having a mortgage on your credit report also looks good.

You’ve applied for credit recently. Too many recent applications for credit can hurt your credit score, even if you’re not actually opening the accounts. Each time your credit is accessed for an application, an inquiry is placed on your credit report. Too many inquiries in a short period of time can hurt your credit score. Luckily, only the most recent inquiries (12 months) affect your score. After two years, inquiries are no longer listed on your credit report. Keep your applications to a minimum, especially since opening new accounts can hurt your credit score.

Having good payment habits is great, but to build a good credit score, you have to be good in all areas, not just one. If you order a recent version of your credit score, you can find out the specific areas bringing you down. Use that feedback to help boost your credit score.