Understanding Your Credit Score

Businesses evaluate your credit score to decide if you are an acceptable risk for mortgage and auto loans and credit cards.? Home and auto insurance companies use credit scores along with other factors to decide whether to sell you a policy. Landlords consider it. Credit scores also negatively or positively affect the terms of the credit you’re offered. Having a higher credit score shows that you can be counted on to pay your debts, so businesses see you as less of a financial risk, which means you’re more likely to get credit or pay less for it.

Understanding what makes up credit score ranges can help you assess whether your credit may need some work. Knowing the factors that affect your credit scores can help you identify how to improve them.

5 factors determine your credit scores

Your credit score comes from the information found on your credit report. If an item does not show up on a credit report, it does not affect your score.

1. Payment history makes up 35% of your credit scores. It is critical to make on-time payments each month. Late payments can damage your credit history for up to seven years.? TIP: Set your cards to autopay so you never miss a payment.
2. Credit usage, (also called credit utilization and debt-to-credit ratio) makes up 30% of your scores.? Of all the credit you have been offered, it measures how much you are using - the less the better.? Keep your borrowing to less than 30%. ? Less than 10% is even better.? TIp: If you’re trying to lower your score immediately, start paying off your cards twice a month or a couple of days before your statement date.? Your statement amount (which is reported to credit agencies) will be a lot lower, so your usage will calculate as lower.?
3. The length of your credit history has a 15% impact on your credit. It is made up of the oldest credit card, the newest, and the average age of all your loans and credit accounts and when each account was last active. The older your credit card, the better, because it shows lenders you’ve been managing credit for a long time.? TIP:? To make this strategy work for you, get a no annual fee card and hang on to it forever, or if you have a card with a high fee that you need to cancel, ask to downgrade it so you can keep the credit history.

REAL LIFE. I received an Alaska Airlines card in 1989. In 2004, I was not traveling very often and had too many travel cards with annual fees.? I just about canceled it, but for some reason hung on to it.? Later when I became a savvy “student” of points, cards & travel, I realized what a blunder that would have been to lose all that history. I’ve now had the card for 33 years.???

1. Your recent credit has a small 10% impact on your credit. When you apply for a new credit card or personal loan and a potential creditor checks you out, it’s called a “hard” pull or inquiry.? Your score may drop an average of 5 points. The fewer inquiries the better. When an employer or insurance company inquires, it is “soft” and does not affect your score.?
2. Your credit mix has also has a 10% impact on your credit. This looks at your categories of credit. Your ability to manage revolving accounts like credit cards with installment accounts like auto loans, personal loans, mortgages, student loans, and retail accounts. TIP:? If you plan to purchase something with cash, consider if taking out a small loan will diversify your credit mix and help your score.

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REAL LIFE. We paid off our home loan and had a mortgage burning celebration. YAY!? Two months later I noticed my credit score dropped significantly because the only credit I had left was just on credit cards; I had no mix.? Aw Shucks.? But I don’t regret it.? It’s nice not to have a monthly house or rent payment. In the mean time, my score climbs up several points every month and I’m back in the “Exceptional” range.

Learn more good points

What Is a Good Credit Score? LINK

Raising Your Credit Score LINK

Make on time payments every month. Use less than 30% of the credit you have. Keep older credit cards. Shopping for new credit has a slight effect on your score. Mix it up with a variety of borrowing categories.