guide to your credit score

Your credit score.

There are 5 factors that make up a credit score.

35% - Payment History

30% - Credit Utilization

15% - Length of Credit History

10% - Types of Credit

10% - New Credit

100% = your credit score

Let's get started.

Most important: Payment History

Payment history is essentially how good you are at making payments to your credit cards, loans, lines of credit, mortgages, etc., on time. Missing even one payment can be a big slip up on your credit report and negatively affect your credit score.

Best practices.

If you are a forgetful person, set all of your payments to recurring minimum or full payments. This will allow you to go worry free month to month knowing that all of your bills will be paid. The only downside to taking this route is the fact that you might not always have enough money in your bank account to cover your payment, which will lead to overdrafts and overdraft fees.

If you are NOT a forgetful person and you check your balances and accounts daily or weekly, pay them manually. You will always know what is going on in your accounts and never have to worry about overdrafting.

In order to boost your credit score the most, pay your payment right after you get your snail-mail or online statement. If you pay before the statement date, it will look like you didn't use your card that month. And if you pay late, well that's just bad. Creditors and lenders want to see that you are using your credit each month and using it responsibly. 

Next most important: Credit Utilization

This factor takes into account how much of your available credit limit is outstanding.

Example: You have a credit card with a credit limit of $2,000. You also have a line of credit with a limit of $8,000. You have used $600 on your card and that is your outstanding balance. You have not touched your line of credit so your balance is $0. 

Credit Utilization = Outstanding Balance / Credit Limit

Credit Utilization = $600 / $10,000

Therefore, your credit utilization rate is 6%.

Your credit score will be at its best when your CU rate is anywhere from 5%-20%.

0%-5% is just fine, as well as 20%-30%, but try your best to keep your balances < 30%. 

If you can not, try to pay your balances back down to that healthy range as soon as possible.

Next up: Length of Credit History

This one is easy. This factor is just how long you have had your credit accounts for.

It takes all of your credit accounts and averages the length that you have had them.

The older your accounts average age is the better. So, it is best to start as young as possible!

I would recommend starting with a College Credit card if you are going to school, or a secured credit card if you are taking another route and have no, or not very good, credit history.

These last two factors matter the least in determining your credit score.

Types of Credit

This factor just looks at how many different kinds of credit you currently have.

Different types include:

1. Revolving accounts (credit card, line of credit)
2. Installment loans (auto loan, personal loan, student loan)
3. Mortgage (mortgage....)

Over time you will get most of these different types of credit. Nothing to worry about now, just focus more on the major factors.

Lastly: New Credit

Every time you apply for a new loan, card, mortgage, the lender will run a "hard credit inquiry".

This will the lender to look at your credit history, credit score, and credit report. Every time that you apply for a new source of credit and get an inquiry, it will negatively affect your score. Not by very much for the most part. I like to think of it like the phrase, "you gotta spend money to make money", well, you gotta spend credit to get credit. Try to keep your inquiries under 2-3 per year and you shouldn't see much real affect on your score. Get up to 17 like I did and that's when you'll notice a change.

Those are the basics! If you have any additional questions feel free to comment or email me!

andrejrdube@gmail.com