Part of accurately building your credit is by understanding it. That begins with a breakdown of the factors that play into your score. The assumption by many is that credit is based solely on our ability to pay back money. While that is an aspect – it’s important to look at the collective.
Let’s elaborate on the 5 components of credit. Below we’ve got some examples to further help explain what each section means. These are made up examples and do not pertain to actual people or advice.
- Payment History: How well you’ve done with paying back your charges – based off consistency of repayment. Example: Debbie pays a little over her minimum payment before the due date.
- Amounts Owed: How much you owe compaired your credit limit. Example: Debbie’s credit limit is $500 and she has a balance on her credit card of about $50 at a time. This is 10 percent of her limit, so her ratio of credit to amount owed is pretty low.
- History Length: How long you’ve had your credit. Example: Debbie has a credit card that she’s had for about 10 years. It shows over time how she’s used the card and done with making payments.
- New Credit: Based off opening new lines of credit. Example: Debbie opened a credit card, got a car loan, and opened a store credit card all in within two months. This could cause her score to drop.
- Credit Mix: Diversity and amount of credit lines. Example: Debbie has 5 lines of credit now: a department store credit card, a car loan, a secured credit card, a credit card through a bank, and a major credit card.