Your payment history is likely the most prominent aspect of your credit score, but it actually only accounts for 35 percent. There are four other elements that decide your creditworthiness:
- The length of your credit history (15 percent)
- The number of new credit accounts you have (10 percent)
- The mix of credit you have available (10 percent)
- Your utilization, or the amount of your total credit you’re using (30 percent)
Revolving credit plays a big part in each of these factors, having a significant impact on your score.
Credit mix
Having an assortment of credit types may show lenders that you can handle various forms of debt responsibly. The ideal credit history might include installment loans such as car loans and mortgages, as well as revolving credit such as home equity lines of credit (HELOCs) and credit cards.
Utilization
Similarly, keeping your utilization low suggests that you can borrow responsibly without overleveraging yourself. Since installment loans are often paid off in terms of years rather than months, the balances that they show in relation to the total loan amount can greatly increase your utilization figure, especially in the early years of the loan.
Revolving credit, however, has more of an impact on your utilization than installment loans. This means that maintaining low utilization on your credit card or line of credit can improve your score even if you're still paying down an installment loan.
In general, you shouldn’t use more than 30 percent of your total available credit, but keeping it below 10 percent is best. In fact, the highest scores correlate with a utilization ratio of one to ten percent.
New credit
Constantly requesting new credit is often seen as a red flag to creditors, indicating that you are not financially stable. That's why credit inquiries that are made during credit applications as well as brand new accounts can ding your score.
With revolving credit, there's less need to request new credit as you won't need to apply for new funds once you’ve used and paid off your previous loans. This decreases both your inquiries and the hits you take when opening a new account.
Credit history age
Although favorable items often stay on your credit report indefinitely, there is a possibility that older installment accounts that you paid off will eventually fall off of your credit report. This is especially true after the ten-year reporting requirement time has passed. This can decrease the average age of your credit history, resulting in a lower score.
Since revolving credit is an active account, you can maintain the length of your history as long as you leave the account open.
Revolving credit can be a helpful tool to increase credit scores, but only if you use it wisely. Avoid carrying high balances and only request credit that you need to avoid getting overwhelmed.
Sources:
- "5 Factors that Determine a FICO® Score," myFICO, September 23, 2016
- "Credit scores: Is 1 percent utilization better than 10 percent or zero?" CreditCards.com, June 7, 2018
- "How Long a Closed Account Stays on Credit Report," The Balance, August 3, 2018
The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person’s situation is unique and may materially differ from the information provided herein. You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made. Popular Bank does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.