To recognize National Credit Education Month, we thought we’d focus this week’s blog on credit. By now we all know that paying your bills late or not paying them at all can drastically affect your credit score. But there are many more factors that go into your score. First, let’s start off with the actual scores:
- 300-629: Bad credit
- 630-689: Fair/average credit
- 690-719: Good credit
- 720 and up: Excellent credit
What Affects Your Score?
Whether you’re looking at your score on Experian, Equifax or TransUnion, all three major credit reporting agencies look at the same things when determining your score (in order of importance):
- Payment History
This one is a factor most people understand. If you have a long history of late payments, your credit score will be lower. However, how late those payments are will affect your score differently. A payment that’s 30 days late will have less of an impact than one that’s 90 days late.
- Credit Usage
Some people think the more credit you have, the better off you’ll be. Not necessarily. It all comes down to ratios. Credit agencies look what you owe with both revolving credit (credit cards, lines of credit) and installment loans (auto loans, mortgages, etc.) and what your total credit is. This is your utilization ratio or rate. The more maxed out you are on all of your credit cards and loans, the higher your ratio is and the lower your credit score will be.
- Credit History Length
Sometimes it pays to be older – or at least have a longer credit history! Agencies will look at the ages of your oldest account, newest account and the average age of your accounts – as well as what accounts you’ve used recently. Opening a new account could lower your average age of accounts as well as your credit score. Keep in mind that closed accounts could stay on your credit report for up to 10 years, and impact the average age of your accounts.
- Credit Mix
You’ll want to have both installment loans and revolving credit to show a healthy mix and improve your score. If you only have one type on your credit, you may want to think about getting the other to help your score. As an example, if you only have credit cards on your history, you may want to apply for a small loan. Just be sure to make your monthly payments on time!
- Recent Credit
Every time you apply for a credit card or loan, a credit inquiry is made. Unfortunately, these inquiries can put a ding in your credit score and can stay on your report for up to two years. If you’re checking your own credit score, that’s known as a “soft inquiry” and won’t affect your score. The good news is if you’re, for example, shopping for a car loan, credit agencies will group together all of those hard credit inquiries over a two- to four-week time period. They will only count as one inquiry and have less of an impact on your score than if all were factored in individually.
Not sure what your credit is? You’re allowed to get a free credit report from one of the agencies per year. Visit annualcreditreport.comto learn more or get your report today.