At its core, credit is the ability to borrow money or access good and services with the understanding that you’ll pay later. You need good credit to purchase a car, to own a home. You even need credit to rent a property.

Building credit can be tricky because you need some base level of credit before you can apply for it. By understanding the five factors that contribute to your score, you can easily build or rebuild credit.

Five Factors of Credit

1. Payment History

Your payment history accounts for 35% of your credit score. Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgements, and charge-offs all have a negative impact. Missing a high payment will have more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.

Quick Tip: Teens and young adults can start to build credit through simple recurring payment services like Netflix or Utilities. By putting their name as the primary account owner and cosigning, parents can set their children up for a health credit future.

2. Outstanding Credit Balances 

Your outstanding credit balances impacts 30% of your credit score. This factor marks the ratio between the outstanding balance and available credit. Ideally, you should keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.

3. Credit History

Your overall credit history accounts for 15% of your credit score. This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area. This is why some financial advisors tell credit card holders to hold onto their credit cards even if they’re not being used.

4. Type of Credit

10% of your credit score is based on the type of credit you have. A mix of loans is better than a concentration of debt from credit cards only.

5. Inquiries

The last 10% of your credit score is based on inquiries. This represents the number of inquiries made on your credit over a sixth month period. Each “hard inquiry” can cost between 2 to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, 11 or more inquiries within a 6 month period will have no further impact on your credit score. If you run a credit report on yourself, it will have no effect on your score.

Improving Your Credit Score

If your score is lower than you’d like, there are some simple ways to bring it up. Improve your credit utilization score by making smaller, more frequent payments on your credit card or requesting a higher credit limit. You can also dispute credit reporting errors if you have valid evidence of the mistake. If you have little to no credit, becoming an authorized user of someone else’s credit card can begin your credit history.

Carter Bank & Trust offers a variety of credit and lending options that could set you on the path to building your credit responsibly. Explore our products and services at CBTCares.com!