Hello everybody, today Fix Your Credit Consulting is going to explore credit scores and what exactly goes into calculating those numbers.
Understanding your credit score can be a tricky thing and can sometimes feel like you are trying to decipher an archaic text in another language. And the people that calculate the scores don’t make it easy to understand on purpose! The three bureaus that decide and control credit scores (which are named Equifax, Experian, and TransUnion) intentionally try to obfuscate how credit scoring works, partially as a way of maintaining their monopoly and our reliance on them and their algorithms. However, various credit experts from across the credit industry have been able to estimate how different aspects of credit impact your credit score.
Most people agree that your credit score is determined by the following aspects, broken down into five categories:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Credit Mix (10%)
Now let’s dive into what each of these categories mean.
First off we have Payment History which makes up 35% of your credit score, the biggest single portion of any category. This is representative of your history of paying back your debts on time (that means on the due date–not after). What this means is if you want to improve your credit score you should pay your bills for your credit cards and loans on time and avoid being late
Next we have Amounts Owed which is responsible for 30% of your score. Put simply, this is just how much money you owe to creditors, in other words how much debt you have. If you want your credit score to be higher that means paying off everything you owe, a task usually easier said than done. As a general rule of thumb for credit cards, you should never utilize more than 30% of your total available credit. In other words if you have a credit card with a maximum of $100, then never have more than $30 that you owe. If you do, pay it off immediately.
Length of Credit History accounts for 15% of that magic number. All that means is how long you’ve had your credit cards and other lines of credit open. An easy way to maintain your scores in this regard is to not close any credit cards you have that are in good standing. Another strategy is to open up cards that you will only use every once in a while (to make sure they won’t be closed) that will never carry a balance. Let these cards age and in a few years they will help your credit score immensely.
New Credit, on the other hand, equates to 10% of your score. Basically this means that if you open new credit cards or lines of credit too fast and frequently it can drop your score by up to 10%. So if you do plan to open up new lines of credit, wait between each one to minimize the impact on your credit score.
Finally, Credit Mix is also 10% of your credit score. This means having a mix of different kinds of credit, such as mortgages, auto loans, and credit cards. If you only have loans or primarily have loans then it could help to open up a credit card or two to balance it out. Here’s our rule of thumb: you want to have two three cards open and one to two loans open at any given time. The loans show you can manage long term debt, while the cards provide you with available credit.
There it is, your credit score and everything that goes into it! With this information, you should have a better understanding of what exactly it means and how your credit habits shape it.
If you have any questions feel free to call us at (877) 212-2450!
If you have any questions, feel free to give us a call at 877-212-2450!
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