Does it really matter?
Credit breakdown and impact
Breaking down your credit score is not a hard task, but it certainly is an important part of understanding how to improve your credit. The components of your credit breakdown include payment history, credit utilization, credit length, new credit, and credit diversity.
The most heavily weighted part is payment history, which accounts for how well you’ve paid your bills on time, the number of delinquent and past due accounts. Payment history tracks payments several years into the past. While no late payment is ideal, those that are later than 30 days are inclined to be the most detrimental. In some cases, preventative measures like consolidating payment dates, autopay and other means can alleviate the stress of worrying about potentially missing a payment.
The next component of properly understanding the credit breakdown is credit utilization, which is also known as outstanding debt. Credit utilization is the ratio of outstanding credit card balances relative to your credit limits. A quick way to determine your credit utilization is to divide your credit balance by the credit limit then multiply by 100. In general, the lower your utilization the better, as it indicates that you are not overusing the available credit. There are many ways to improve your credit utilization, which include making multiple payments in a payment cycle, as well as scheduling payments around the dates creditors report to the bureaus.
Length of credit history is not a significant percentage of the overall credit breakdown; however, it is no less important. Credit length is the amount of time that a specific account has been open. This part of the breakdown accounts for the age of the oldest and newest credit accounts as well as the average age of all accounts combined. An effective way to maximize the impact of responsible credit usage is to the leave account open, and occasionally use the card. For those who don’t have significant credit history, one method to improve your credit history is to consider using a secured card.
Another part of the credit breakdown is new credit, which makes up roughly 10 percent of the overall credit score. New credit is a measure of the frequency of new credit applications in the most recent 12-month period. With each new credit request a hard inquiry occurs, which lowers your credit score as a result. A few hard inquiries in a short period is usually not a concern, however too many inquiries in a short time frame can be a major red flag to lenders.
The last aspect of your credit breakdown is credit diversity. With this part of the breakdown, the variety of credit accounts in your portfolio is the last major component that lenders use to determine your eligibility for a loan. The importance of credit diversity is rooted in lenders wanting to see that you are able to successfully manage a variety of accounts, which typically includes but is not limited to credit cards, home, auto and student loans. While there is no standardized rubric for determining the perfect mix, as a general rule the more divers your credit accounts are the better your credit will look in most instances.
