Last week I met with a client to address her concerns about her credit score having dropped from “very good” to “good”, as noted on her Capital One credit card statement.
After we reviewed the details together, she was relieved when I pointed out that it had only dropped one point and that her score was in the “Very Good” category for the three major reporting agencies, discussed later in this newsletter.
The “Good” rating was Capital One’s term.
While I appreciate them offering some parameters that will notify clients of any drastic changes in their credit, theirs is not the number that is reported when you go for a loan.
What Factors Affect Your Credit Score?
Payment History
Creditors want to see a trend of you making payments on time, every time, even if it’s just the minimum payment due.
Carrying a balance on a high interest credit card is a financial planning 101 topic separate and apart from this, (it’s akin to throwing dollar bills in the trash), but paying the minimum amount due ON TIME (not the next day) is imperative to maintaining good credit.
This is the factor most heavily weighted.
Credit Utilization Ratio (you want this number low)
Simply stated, if your credit cards are “maxed out”, your ratio is not good.
Lenders want to see that you have the option to use the credit, but don’t.
For example, if you have three credit cards each with a $10,000 limit ($30,000 total limit), lenders don’t want to see you charging $25,000 every month, even if you pay it off in full.
You are using almost 85% of your available credit (25/30).
Conversely, if you are carrying an average $5,000 monthly balance you are only using about 15% (5/30) of your available credit. Lenders like this.
Length of Credit History
Different from payment history (and not as heavily weighted in your score), creditors look at the average length of all your credit accounts.
This is why it often makes sense to keep an old credit card open, even if you’ve moved on to a new shiny one to get those Disney rewards.
This is why it’s also good to get teenagers/young adults started with some form of credit in their early years, and teaching them how to use it responsibly. This will put them on a solid foundation for a good credit score, which they will need for their first car loan or apartment (without mom or dad co-signing).
Types of Credit
Having a diverse mix of credit and being able to manage all of them effectively at the same time helps boost your credit score.
This doesn’t mean various credit cards from Macy’s, Amazon and Homegoods.
This means entirely different types of loans, such as a mortgage, car and student loans, along with your credit cards.
New (Hard) Credit Inquiries
How many new accounts you’ve opened and how many “hard inquiries” that come in from lenders have an effect on your credit score. Hard inquiries happen any time you are opening a new card or applying for a loan.
Too many in a short period of time makes a lender nervous and negatively impacts your score.
Separate from your credit score is the actual REPORT that affects your score.
There are three major credit reporting agencies: Transunion, Equifax and Experian.
You can and should be checking your report at least annually. The report will provide a comprehensive overview of your credit history and allow you to flag any activity that does not look right.
Admittedly, I had not looked at my own in a long time, but after helping my client walk through the process, I did check my own as well.
Follow this link to bring you to the ONLY official website you should be using.
You should NEVER pay for any information regarding your personal credit. If you are being asked to pay, you are in the wrong place! Come back here and use this link!