Credit Score Makeup
So…How Exactly is Your Credit Score Determined?
Diving into the components of your credit score, in order of importance
Payment History (35%)
Your debt payment history makes up 35% of your credit score. Makes sense, right? The most important thing to a potential lender is whether or not you can make your payments on time.
This doesn’t mean that you’ve paid your debt totally off…it just means that you’re making at least your minimum payment every month.
It also factors in how late the payment was, in 30, 60, and 90 day increments. Being 30 days late on a card once will have a smaller impact than an account going into collections, for example.
Missed payments take seven years to fall off your credit report — which is why we always want to at least make the minimum payments, whenever possible.
Debt to Credit Utilization Ratio (30%)
This sounds more complicated than it is…your “credit utilization ratio” means what percentage of available credit you’re using, at any given time. If you’re utilizing a high amount of available credit, banks worry that you might be overextended and at a higher risk of defaulting.
You want to keep your credit utilization as low as possible — ideally under 30%, but lower than that is even better. This means that if you have a credit card limit of $1,000, you want to keep your statement balance below $300, if possible.
My best tips for keeping this low are:
Make more frequent credit card payments (2-4x/month). If we take that $1,000 CC limit, for example…let’s say you always spend $500/mo on that card. If you only made on payment per month your utilization ratio would be 50% which will negatively impact your score. But, if you pay the bill twice a month your balance will never be higher than $250, making your utilization ratio 25%
Ask your credit card company for a credit limit increase (though don’t do this if you’re going to use that higher limit to accumulate more debt, k?). Make sure they only do a “soft credit pull” for this. This is a totally normal thing to ask your bank for — and they’ll often even increase your credit limit automatically
Length of Credit History (15%)
In general, a longer credit history will get you a higher credit score. This shows banks that you’ve been able to handle your credit responsibly for years, which makes them feel more comfortable. (Same reason why adults get cheaper auto insurance rates than teenagers…your experience makes you more reliable.)
More specifically, it takes into account:
The age of your oldest credit account
The age of your newest account
The average age of all your accounts
This is why we generally don’t want to close our oldest credit cards, even if we’re not using them too much — because the oldest card is important for keeping your length of history as long as possible.
Credit Mix (10%)
Welcome to the most frustrating component of credit scores!! Banks want you to have a high mix of credit types — credit cards, mortgages, auto loans, etc. That’s why when you pay off your student loans or car payment, sometimes your credit score can take a hit. It’s frustrating, but don’t worry about it too much — it only makes up 10% of your score. You certainly don’t want to keep a loan open just for your credit score, when you have the availability to pay it off.
New Credit (10%)
Opening a bunch of new lines of credit at the same time makes banks nervous. You want to limit the number of accounts you’re applying for at any given time. This isn’t usually a huge deal, unless you’re trying to get a big loan (like a mortgage) within the next couple years. Apply for the credit you need — but don’t apply for any extra cards just for the fun of it.
Note that new credit also lowers your average length of credit history — so if you get tons of new cards, you’ll get in both categories.
Okay…But what’s next?
If you want help figuring out how to increase your credit score, let’s chat! Schedule a call with Beyond Money, and let’s get started!