Credit Score Basics

A simple, yet comprehensive lesson on everything you need to know about your credit score. There are. a few reporting bureaus which you may have heard of.

• FICO

• Equifax

• TransUnion

They all work in similar ways. I will break up the components of all three so you understand how they work. Let’s start with the FICO score.

FICO Score

• 35% - Payment History: Making on-time payments ensures to keep your payment history “exceptional”.

• 30% - Utilization: Your credit utilization is the percentage of your balance over your total credit limit across all accounts. It is recommended to keep this percentage under 30% to keep your score as high as possible.

• 15% - Credit Age: The average time you have had all accounts, whether thats credit cards, student loans, personal loans, etc. A tip is to not close any credit cards that don’t have an annual fee. This is because it strengthens your credit history.

• 10% - Hard Inquiries: Keeps track of how many times your applied for new credit.

• 10% - Types of Credit: Takes into account how many different types of credit/debts you have (ie., credit cars, personal loans, student loans, car loans, mortgage, etc.).

The largest way (65% of your score) is to make sure you pay on time and keep an overall balance under 30% of used credit. So if you have 1 credit card for example with a credit limit of $1,000, make sure you keep your balance below $300. It’s okay to use the whole $1,000 and pay it back. The credit bureau will only report the balance once per month typically so as long as you pay it back quick enough, you can avoid a high reported balance.

Now let’s look at your Equifax Credit Score and TransUnion Credit Score.

• Payment History: Making on-time payments ensures to keep your payment history “exceptional”.

• Utilization: Your credit utilization is the percentage of your balance over your total credit limit across all accounts. It is recommended to keep this percentage under 30% to keep your score as high as possible.

• Derogatory Marks: If you miss payemnts and they go into collections for example, they will show up here.

• Credit Age: The average time you have had all accounts, whether thats credit cards, student loans, personal loans, etc. A tip is to not close any credit cards that don’t have an annual fee. This is because it strengthens your credit history.

• Total Accounts: The total amount of accounts you have (credit cards and other loans).

• Hard Inquiries: Keeps track of how many times your applied for new credit.

These score in theory shouldn’t differ too much from your FICO score, and one isn’t necessarily more important than the other, what’s important still is that you’re making on-time payments and you keep your utilization low.

So to recap, here are some tips to keep your credit score as high as possible.

• Always make on-time payments

• Keep your credit utilization below 30%

• Keep old credit cards open if they do not have an annual fee to keep the account open

  • Some companies may close your account if you don’t use it, so every couple months make a purchase on it just in case.

The other components really just come with time. Try not to apply for credit if you don’t need it to keep your hard inquiries down, although after a year or 2 these get removed from your account anyway. It is also a small portion of the makeup up your score. The older you get, the longer and more credit history you will have. Lenders of credit will deem you as more creditworthy, meaning more trustworthy to take on more debt.