Credit scores are complicated. There are numerous companies who calculate credit reports. What’s more, those companies have different versions of their credit calculators, so any given person can have tens or even hundreds of different credit scores. In this way, credit reports can seem subjective or arbitrary. While that may be true, credit scores can play a role in which credit cards we receive and what loans we get approved for. And now some employers are even running credit checks on their potential new hires. Read on to learn all you need to know about what goes into your credit score.
The industry leader when it comes to credit scores is FICO. They set the standard and started releasing credit scores to lenders in 1989. Since then, however, a number of new names have entered the market like VantageScore and CE score.
How is my score calculated?
Your FICO score is broken down accordingly:
- 35% – Payment history
- 30% – Amounts owed (debt)
- 15% – Length of credit history
- 10% – Types of credit used
- 10 % – New credit
- Payment history The most important aspect of your credit score is repayment history. It includes information on all of your payments (or lack thereof) and whether you were late or on time. It takes into account things like foreclosures, repossessions, and settlements.
- Amounts owed (debt) This section is complicated by the fact that having debt isn’t necessarily a bad thing for your credit score. It includes your debt-to-limit ratio, the number of accounts with debt owed, and the total amount of debt across all accounts. If you’re keeping up with payments and not hitting credit limits, this section can work to your advantage. Owning huge amounts and having poor repayment habits will certainly harm your score.
- Length of credit history Being consistent in paying off your debt over a long period of time can be reflected positively on your credit score. Similarly, if you have a very short credit history, lenders are less likely to approve you for what they see as potentially risky loans. This section also includes the amount of time you’ve had certain accounts and how long it has been since you used those accounts.
- Types of credit used If you have proven that you have successfully managed multiple types of credit (retail cards, credit cards, student loans, mortgages, etc.) this will reflect positively on your credit score. A lack of credit diversity won’t win you any extra points.
- New credit Beware of opening several new cards or taking on multiple loans within a short span of time. It will raise red flags to lenders that you are having financial difficulties and are a risky borrower.
Build good credit habits
Credit scores are daunting and we often overlook them if we aren’t in current need of loans. But like maintaining your health, it’s important to take preemptive measures to nurture your credit score. Here are some good habits to build that will save you money and stress in the long run:
- Check your free credit report annually
- Set up auto-pay on credit cards and loans and keep an eye on your checking account to make sure it has sufficient funds
- If you are in financial trouble contact your lenders and ask about your options. Going AWOL is the worst thing you can do on your credit debt
- Keep credit card balances low and avoid opening several cards within a short period of time
- Take advantage of free online tools like Credit Karma to calculate your debt repayment