Credit Scores

Although it’s not the most riveting subject to read about, in order to beat the game: we need to know the rules!

What’s a good score?

Credit scores range from 300-850.

Why do I need a good credit score?

A good credit score will ensure that you pay the least amount in fees, interest, or deposits. In the case of a job or a rental unit: that you don’t get denied due to bad credit.

• Rental
• Car loan
• Credit Cards
• New job
• Utilities
• Cell phone plan

How is my credit score calculated?

• Payment History 35%
• Amounts Owed 30%
• Length of Credit History 15%
• Credit Mix 10%
• New Credit 10%

The most important part of your credit score is whether you have a history of paying your bills on time. So if you’re ever at the point when you can’t pay off your entire balance that month, at least pay the minimum payment so your score doesn’t suffer.

The next most important part is how much you owe relative to how much credit you have. For example, if you have a credit line of $2,000 and you have used $1,990 that will not look good for you and your score will be lower than if you had only used $200.

The length of credit history is simply how long you have been using credit. As soon as you are able, you should open up a credit card to start creating your credit file. As long as you are responsible about using it, you will be helping your financial future.

Credit mix is about the different types of accounts we have on our credit. For example: credit cards, car loans, mortgages, retail accounts. It looks good to have different types of accounts, but you won’t have a low score if you don’t.

Lastly, new credit scores how many new accounts you have opened within a short time frame. The effect of opening a new account lessens after a year and completely falls off your credit report after two years. Try to space out the accounts you open.

What’s the fastest way to improve my score?

Since the biggest component of your score is the payment history, in order to have good credit you have to pay on time every month. However, the fastest way to bump up your credit score is to owe less money than you have available to you. Also, avoid opening accounts in a short period of time.

For example: if your credit line is $2,000 and you’ve used $1,990 you should pay it down as fast as possible. It looks decent if you don’t spend over 30% of your credit limit. It looks even better when you don’t spend above 10% of your credit limit. In this example, 30% of 2,000 is $600 and 10% is $200.

Tip: If you’ve been a responsible credit card user, you can always request a credit line increase. This will also help your credit because it will lower the percentage that you owe.

Another possibility is to pull your credit report and if you find any mistakes: file a dispute with the credit bureaus.

The rest of the factors are things you can’t change immediately. For the length, you just have to give it time and make sure you keep your old accounts open, unless they charge an annual fee. In that case, you should downgrade the card to one that doesn’t charge an annual fee and keep it anyway.

Tip: To make sure that you continue using the card in a way that won’t hurt you, make a recurring payment on that old credit card, preferably one that is always the same amount, like your internet bill. You also set that card to automatically pay the statement balance from your account each month. This way you always know the exact amount that will be withdrawn from your bank account for that card and you are paying it off in full every month, but you are still using it and thus showing you are responsible.

Credit Bureaus

There are three credit bureaus: Experian, Equifax, and Transunion. These three credit bureaus are the ones every company reports your payments to. Sometimes not all of them will have everything you do reported to them, for reasons I am not sure of, so your score can differ slightly between them. The score you get is called a FICO score.

There are actually many different FICO scores and they each score you slightly differently. No matter which score is being used, if you keep your payments on time, your usage low, and your new accounts low as well, you should be fine. Also, keep old accounts unless they charge you an annual fee.

TLDR:

• Keep your score as high as possible by:
  • paying on time every month
  • paying the statement balance for your credit cards each month
  • using your credit cards, but staying under 30% of the credit limit
  • requesting a credit line increase every year
  • not closing old cards: switch them to no annual fee accounts
  • checking your credit report for errors and disputing any you find