Credit Score 101

What’s There to Know About Credit Scores?

The principle of a credit score is a no-brainer – the better you are about paying your bills on time, the better your score will be.  And since it’s taken into account by lenders, utility companies, landlords, and even prospective employers, it’s obviously important. So what else is there to know?

    It’s true that making payments on time is the most important aspect of your credit score.  But knowing what else goes into it can help you make wise decisions to improve or protect it.  That way, you’re set up for the best outcome later once it’s checked – landing you that super low interest rate, additional cell phone line, or job offer.

    Though the three credit bureaus - Equifax, TransUnion, and Experian - all use their own complex algorithms to calculate a person’s score, in general, it’s based on five areas:

  1. Payment History:  Just as you’d guess, the biggest impact on your credit score - accounting for 35% of it - is how often you make late payments.  This includes loan payments in addition to other accounts with places like the electric, cable, or cell phone company. And companies don’t just report that a payment is late, they report whether it’s 30, 60, 90, or 120 days late.  So don’t assume that if the due date slipped by you can take your time!

  2. Amounts Owed:  Your total debt accounts for 30% of your score, which is based on what you owe compared to others your age and how you use your available credit.  That’s because if you’ve maxed out all your available credit it can look like you’re short on cash, making someone wonder if you can afford to tack on another bill.  To avoid this perception, a good rule of thumb is not to swipe more than 50% of your credit limit.

  3. Length of Credit History:  In general, companies prefer customers who don’t flake out after a short period of time, so your “average account age” makes up 15% of your score.  That’s why it’s a bad idea to open then close that store credit card just for the initial 10% off! Make sure your average age isn’t too low by keeping your accounts open at least 2 years.  

  4. New Credit:  Have you ever known someone whose credit score took a hit after car shopping? That’s because 10% of it is affected by new credit.  That includes recent credit checks that, if racking up, can give the impression you’re desperate for cash. The good news is any credit checks made within 14 days for the same type of loan (not including credit cards) are counted together.  So next time you’re stopping by dealerships to compare car loans, try to wrap it up after 2 weeks so it doesn’t look like you hit people up for loans all the time!

  5. Credit Types:  The last 10% of your credit score is based on how well you manage a mix of different accounts, like credit cards, student loans, and a mortgage.  To make sure you have a variety, try to maintain at least one credit card and one fixed loan (like a car loan or student loan), and put some utilities under your own name and not just your roommates’ or SO’s.

It’s easy to forget about your credit score until it’s time to apply for that loan or sign up with a new service-provider.  But by remembering how your score works before that point, you can set yourself up for stellar marks once the time comes!

Meera Meyer