Your credit score is used by more than just a potential lender. Your car insurance carrier, home insurance carrier, a prospective landlord, cell phone company, or utility company may all be looking at your credit worthiness. All the more reason to understand your score and maximize it!
A FICO score is the most common score, (named after the Fair Isaac Corporation which first developed a credit risk formula) but each credit bureau, Equifax, Experian, and Transunion, use information from your file with them to create a FICO score, and they have collaborated to create the VantageScore.
There are five major components to your score. Remember, scores can vary because of different information in your file and different weights given to the components. Here is an example of a typical FICO score.
The most important part of your score is your payment history – do you pay your bills on time? Late payments have a very negative effect on your score. If you bank online, we recommend that you set up your credit card payment so that a minimum payment is always made. This way, if you forget to make your payment (which we hope is a paying the full balance each month!) at least the minimum payment is made and you avoid a late fee and a late payment mark on your file.
The second most important part is how much you owe. How much of your credit available are you using? Ideally, you are using no more than 30% of your available credit at any one time. So, let’s say you have two cards, each with $5,000 credit available, $10,000 in total. If you have a balance of $3,000 on one card and $1,000 on the other, you are using 40% of your credit. This affects you even if you pay off your balance in full each month, which may come as a surprise! This means that if you regularly charged $5,000 per month, paid it off completely, and charged another $5,000 next month (to get those travel rewards) it appears as if you are using 50% (in this example) of your available credit. You may want to ask for an increase in your credit limit if you find yourself in this situation. If you carry a balance, by paying down your credit card debt, thus decreasing your amount owed, you will increase your credit score.
You can’t do much about the length of your credit history, other than keeping open old accounts. While it can be tempting to close an old account you no longer use, it’s better for your score to keep it. We suggest that you use the card for some purchases to reduce the chance that the card company will cancel it. Perhaps take one small bill that can be paid automatically through that card (like Netflix).
Opening up new credit lines in a short amount of time can have a negative effect on your score, so only open cards that you really need. We recommend saying no to offers of a one-time discount if you open a card today. Better to stick with two or three cards that truly meet your needs. (Having more than one card that you use regularly means you are not dependent on one card company. It’s okay to use one as your main card, but use one or two back up cards as well).
The last components of your score are the types of credit used. This looks at the types of credit accounts you have and how many of each. For instance, you may have an auto loan, mortgage, and an installment loan. You don’t have to have every type to have a good score, but a mix can be beneficial.
You can check your VantageScore for free by registering with www.creditkarma.com which we recommend. There is a wealth of information about credit on that website. We also recommend that you get your annual copy of your credit report from each credit bureau at www.annualcreditreport.com. Stagger your request every four months, for instance: Sept – Equifax, January – Experian, and May – Transunion.
A FICO score has a range of 300 to 850. The VantageScore range is 501 to 990. Each lender is going to have their own guidelines as to what comprises a “good” score. Here is an infographic that looks at a FICO score. It really shows the financial benefit of having a good score!