Credit Scores Demystified
Length of Credit?!
So dad not letting me get a credit card until college was actually a terrible idea?
If you can name something more mysterious than credit scores, comment below and I will personally buy you coffee. Like, WHAT is it? Why am I being graded and why did no one tell me about this? I really thought I was going to be done with grades after college. Think again!
Mystery aside, it's important to understand that the most crucial piece of information that will impact your ability to get a home loan, or the amount you can borrow towards a home is this ever mysterious score. In short, it tells lenders whether you are creditworthy (aka-your loan-ability). It will also impact your interest rate! Credit is a fickle bitch but you need her, so buckle up.
The credit scale starts at 300 and goes to 850. In general, credit scores of 700 or higher are considered good.
Where do you fall? Not great? Don't worry, we got you.
The only way to improve your score is to understand what makes up your credit score. Your FICO credit score has 5 primary factors that are weighed in determining your overall score:
PAYMENT HISTORY 35%
- This is the measure of if you pay your bills on time. If you are in ‘good standing’ (as seen on your credit report) that means you have paid your bills on time and your credit score should go up or stay the same. This is the most heavily weighted piece of your FICO credit score so pay your bills on time!
AMOUNTS OWED 30%
- The second most weighted piece of your FICO credit score is ‘amounts owed’. This is a measure of the amount of money you owe in relation to how much available credit you have. That is to say, if you have a credit card with a limit of $5,000 dollars and have $4,000 balance, this does not reflect well for your credit score. The easiest way to improve this area is to pay down your balances if you have any--particularly on revolving lines of credit (credit cards).
LENGTH OF CREDIT HISTORY 15%
- This is where having opened that credit card when you were 18 paid off. Length of credit history is a measure of the length of time you have been borrowing. This one highlights the importance of having credit available and shows why it is important to start building good financial habits at an early age. This one makes the least sense to some, because if you just happened to be paying your bills with cold hard cash, or Debits, shouldn't that look better for your score? Unfortunately, no. Only credit payments matter.
NEW CREDIT 10%
I would not like to open the store card today.
- New credit measures any new lines of credit you open. This is for those of you that have a credit card at every major retail store out there. What’s the lesson? Have a good mix of credit but do not overextend yourself because it may reflect to a potential lender that you are looking to spend more than you can afford.
TYPES OF CREDIT USED 10%
- This is the measure of the FICO score that takes into account what type of credit you have available to you. It is important to have a good mix of credit in your history- car loan, major bank credit card or mortgage just might be a few. But do not look to open 17 credit cards just to try and boost your new credit score because it might reflect poorly in your types of credit that are used.
Feeling intimidated? That's okay. Understanding what makes up a credit score is the first step to improvements. We'll be posting more content with detailed advice in this realm in the Personal Finance Section of HomeBirds! Make sure to come back for more :)