What Goes Into Your Credit Score?
Shortly after entering the real world we are greeted with a new measuring stick: Our Credit Score. We hear about credit scores again and again, we hear about credit scores affecting your ability to get a home loan, a car loan, and possibly even your dream job. But what goes into a credit score and why is it used? There are a lot of factors that go into a credit score, but it’s important to understand them so that you can ensure you have the best score possible.
The largest portion (35%) of your credit score is determined by your payment history. In essence, how reliably have you paid back your existing credit? This tells potential lenders how likely you would be to repay them, if they were to offer you a loan. If you have missed payments in the past or been late on payments, these are the kinds of things that will lower your credit score in this category. If you have missed payments in the past, but have been good about paying on time more recently, your credit score will continue to go up, as long as you continue to make payments on time consistently.
The amount you owe on existing loans is the next biggest category that credit scoring agencies will look at, accounting for 30% of your credit score. Here they are looking for the amount you currently owe compared to the original amount of the loan for loans like mortgages or car loans. For credit cards, they are looking for the typical balance you carry. If you regularly spend more than 30% of your credit card limit, you are likely lowering your credit score by doing so. As an example, if your credit card limit is $3000, you should try not to spend more than $1000 a month on that card if you want to keep your credit score going up.
Length of Credit History
Lenders will also look at how long you have had the credit that you currently have. This makes up about 15% of your overall credit score. Lenders like to see that you have opened and held credit lines for long periods of time. If you don’t have long standing credit lines, don’t worry too much, just keep the ones you have open so that they continue to age over time.
If you have opened new accounts recently, that tells lenders that there is potential for your spending to increase on those credit lines, thus increasing the competition among lenders for repayment. If you are planning to get a loan for a large purchase soon, you might want to hold off on opening any new credit cards. This only makes up 10% of your credit score though, so I would focus your efforts on the first two categories.
Types of Credit in Use
The final 10% of your credit score is calculated by the types of accounts you have. Lenders like to see a variety of accounts, showing that you can responsibly repay a variety of different lender types. If you don’t already have multiple types of accounts, don’t run out and open them now, as that will affect the above categories more than this one.
Overall, credit scores range from 300 to 850, and generally anything above 700 is considered good. There are common misconceptions that things like marital status or income affect your credit score, but they actually don’t have any impact at all. Now go out into the world feeling empowered to answer the next time someone at the park asks you what goes into your credit score. That happens in real life, right?