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No Nonsense Guide to Credit Scores and What They are Based On

Your credit score. That number that you know you should probably know because all the adultiest adults in your life talk about it. It’s that magic number that you once heard had something to do with your bills but that’s hard to think about so you’ve mostly been sticking with the Tinkerbell method of faith, trust, and pixie dust to get you through (we’ve all been there!). The good news is that it’s not that hard to understand once you break it down. The bad news is that pixie dust probably won’t help you if your score isn’t as good as you’d hoped but there are lots of non-magic ways to get you through.

So, what makes up a credit score?

There are five main parts to your credit score. Payment history, credit usage, credit age, account mix, and credit inquiries.

Payment History – 35%

The most influential factor of your credit score is your payment history. Late payments, accounts in collections, foreclosures and bankruptcies stay on your credit report for 7 years though after 1 year their influence on your score begins to decline slowly.

Credit Usage – 30%

The second most influential factor of your credit score is your credit usage. This is simply the amount of credit you are currently using versus the amount of credit you have access to. Ideally, you should keep your total and individual account usage to below 20%*.

Revolving accounts (credit cards) are weighted more than other types like home and car loans

Credit Age – 15%

This looks at your oldest, newest, and average account age. You’ll want to aim for an average account age of at least 5 years.

Account Mix – 10%

The mix of type of credit that you have. Creditors like to see a healthy mix of credit cards, home loans, car loans, student loans, and other types of loans.

Credit Inquiries – 10%

Credit inquiries stay on your report for 1-2 years. Although all inquiries affect your score, multiple inquiries that occur in same month affect your score less (creditors don’t mind inquiries as much when it looks like you’re shopping around for the best deal).

Okay, but why is it important?

Your credit score is your letter of introduction to the various creditors of the world. It may surprise you to learn that your credit score is still important even if you’re not planning on purchasing a house anytime soon or you have all the credit cards you want. Your score affects things you may not have considered such as:

  • Cell phone, utility, and insurance companies could charge you higher rates or require a deposit for low scores
  • Rental applications typically require a credit check and landlords could reject low credit scores
  • Interest rate and the chance of approval are both tied to your credit score for home, auto, and personal loans as well as credit cards
  • The best credit card rewards programs require a high credit score
  • Most surprisingly, your ability to get a job is also tied to your credit score. In many states, employers are allowed to run a simplified credit check on prospective employees. A low score could knock you out of a close competition.

How to improve your score

The ways you can improve your score are many and sometimes complicated. The very basics though are this:

  • Sign up for an account and check your credit score regularly on CreditSesame.com
    • This is my best tip for you. They do such a great job of not only sending you alerts when there are changes to your credit report, they also have tons of information and advice on how specifically to improve your credit score. I cannot recommend them highly enough.
  • Check your credit report yearly for errors or fraudulent accounts at annualcreditreport.com (The law requires reporting agencies to provide you your reports once a year for free.)
  • Pay at least the minimum payment on your balances and make sure you are paying them on time. Save yourself some brainpower and enroll in auto-pay if your card or loan offers it (most do).
  • Work on lowering the balances of your debt beyond just the minimum payment.
  • Open a new credit card to increase your available credit and lower your usage total. *Only do this if you can keep yourself from running up a balance!
Your credit score isn’t calculated with magic and that can be considered both a blessing and a curse. On the upside, there are real and easy ways that you can manage your credit and work towards being the adultiest adult in your group. On the downside, pixie dust is useless so it’s going to take work to make the most out of your score. Adventuring isn’t for the faint of heart but with some time and effort, you don’t need magic to take control of your life.
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