Did you know that the modern credit score didn't even exist until 1989?
That was the year that the Fair Isaac Corporation (what we call FICO) and Equifax launched what was then called Beacon with Equifax. Prior to that, credit evaluation was mostly for business loans or for an individual's credit with a specific business.
Today, your personal credit score plays a huge role in almost all aspects of your financial life. Three little numbers carry a lot of weight!
Your credit score is a number between 300 and 850 that tells businesses, lenders, banks, landlords and even employers how responsible you are with money. People with higher credit scores tend to get better rates on loans and can be eligible for more credit than someone with a lower score.
There are several factors that go into how your credit score is calculated, but here are the top five things that influence your ultimate score, based on the FICO scoring model:
- Your Payment History (35%) - This element is the biggest, and it is based on whether you pay your credit card bills, loans and other accounts on time.
- What You Owe (30%) - A major part of your score is how much of your available credit you're using.
- Your Credit History Age (15%) - Have you had any credit cards for a particularly long time? Your credit score is based in part on whether you're consistent in your finances, or if you're constantly seeking new sources of credit.
- Your Pace of Credit (10%) - If you apply for several new credit accounts in a short period of time, it can be a drag on your score because it can signal that you are a credit risk. One exception: when you're rate-shopping for an auto loan or mortgage, multiple inquiries within a short window are usually counted as a single inquiry, since lenders understand you're comparing offers, not opening multiple new accounts.
- Your Credit Mix (10%) - If you are responsibly handling multiple types of credit, from credit cards to loans, that can help your score. (But don't take out more loans just to mix things up! It's not necessary.)
The Downs and Ups
There are a lot of things you can do that might lower your credit score. You want your score to be as high as possible, so try to do these things to bring up your credit score (or keep it high if it's already there):
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Avoid late payments! When you forget to pay your credit card bill or send in your mortgage or car payment late, it can hurt your score. Usually one payment a few days late isn't a problem, but when you pay late frequently or are more than 30 days late on payments, businesses may report that to the credit score agencies.
- Don't max out your credit! If you have a credit card limit of $10,000, don't spend $9,995 of it! Part of your credit score is based on "utilization" or how much of your available credit you're using. (That said, don't open more accounts just to have more credit available, because the number of accounts you have can be a factor, too.)
- Keep your old cards! You might have a credit card that you opened in college but you barely use anymore. Keep it anyway, and use it occasionally! Part of your credit score is based on how long you've had accounts open and in use responsibly.
- Don't open too many accounts at once! If you're suddenly seeking a lot of new credit, that can be a red flag to the credit agencies. Be careful of when and why you apply for credit.
Need Help?
If you accidentally did things that lowered your score, the friendly, helpful financial professionals at CommonWealth One can help get you back on track! It's easy to make an appointment with a certified financial counselor who can give you some credit counseling, help you create a budget or guide you on saving, investing and more. All you have to do is reach out to us via chat online, call our main number or stop by a branch.
Or, you can sign up for an easy, free one-hour webinar! Join Certified Financial Counselor Emmanuel Obe on Monday, August 31 at noon (ET) as he dives into the art of leveraging credit effectively. You can sign up at cofcu.org/events.
Have a great rest of your summer from all of us at CommonWealth One!
