How is your credit score calculated?

Understanding the makeup of your credit score is the first step toward managing and improving it.

Credit scores are made up of multiple moving parts, and not all components of a FICO credit score are created equal. Here’s a quick guide to get you up-to-speed on what matters, what doesn’t and how you can start improving your score today.

There are 5 Elements to your Credit Score:

As you might expect, payment history is the most influential component in your credit score, followed closely by the amounts you owe. To lesser degrees, the length of time you’ve utilized credit, the number of new accounts or inquiries you have, and the various types of credit accounts you hold also impact your score. Overall reporting also looks at how these factors relate to each other in the context of your personal usage.

To help achieve or maintain a healthy score, always remember the following tips:

  1. Have a system to assure your bills are always paid on time. What most people don’t know is that payments are broken into 30-day increments; Being 30 days late is better than being 60 days late, which is better than being 90 days late, and so on.
  2. Avoid late payments or the excessive use of credit by maintaining a cash “cushion” to pay for unexpected expenses. Don’t “max out” your cards. It’s better to have a high credit limit with a low balance. A little-known tactic for balancing your credit utilization is to spread debt between multiple lines of credit. So, if you have a $10,000 limit on your credit card, and you owe $6,000 on it (60% utilization), you’re better off opening a second credit card and shifting some of the balance to the new account. If you get another card with a $10,000 limit, you’ll have two credit cards with a utilization of 30% or below (assuming you split the balance evenly).
  3. Never close old accounts as the age of these can actually help your score.  If you pay off a credit card, don’t close it! Even if you’re not going to use the card, it’s better to leave it open, and let the length of that credit bolster your score.
  4. If you shop for credit, do so in the shortest time period possible to minimize inquiries counted against you.
  5. Don’t be afraid to use credit. You need several accounts in order to have a credit score. Just be sure to keep corresponding payments within your means. Open new lines of credit at a measured pace ever few years. This will expand your access to credit, and show continued responsibility in staggered increments.
  6. When you’re making a large purchase, like a car, take out a loan. Even if it’s only a $500 loan, having installment credit helps round out your credit history, and boosts your score as a result.

If you have questions about managing your credit, give us a call. We’re happy to help.