Your credit score is something you may not have thought about at all yet. Or thought about for a minute or two if you took an econ class at one point before slowly pushing the terrifying thought out of your head.
You may have a credit card. You may have credit card debt. And we both know you have student loan debt.
But you may not know your credit score, which is directly related to all of these things and will soon come into play when you go to buy a car, get an auto loan for said car, rent an apartment, and get another (or your first) credit card. So we need to fix that.
Let’s just rip off the Band-Aid right now and get to it. Starting from the very beginning, cause that’s a good place to start.
What Is This “Credit Score” You Speak Of?
Well that’s a great question. I’m glad you asked. According to CreditKarma.com:
A credit score is a three digit number calculated from your data-rich credit report and is one factor used by lenders to determine your creditworthiness for a mortgage, loan or credit card. Your score can affect whether or not you are approved as well as what interest rate you are charged.
So what does that mean for you personally?
First, your credit score is going to be on a scale of 300-850. So if you imagine that were the old SAT scale an 850 = a 2400, which means all your peers hate you but American Express (Harvard) will totally let you in. And a 300 is you having slept through the test and also brought a #5 pencil.
Credit Karma classifies a “good” score as 720 or higher, so an 1800 according to the fine people at The Princeton Review. Did that help? Okay, fantastic. Moving on.
What Elements Contribute to This “Credit Score”?
Another excellent question! Let’s bang out a list shall we? But first, we need to talk about FICO.
FICO, is a company that provides analytics software and services, but you should care about them because they are the alpha dog in the credit scoring world. They kinda make the rules that financial services companies follow and what FICO thinks of you, in the form of your FICO Credit Score, is what financial institutions will think of you.
So here are the 5 things that matter to FICO:
1. Your Payment History: 35% of Your Score
Pay your bills on time. Every time. All. The. Time. I can’t emphasis that enough. If you pay your bills on time banks will like you. They will think you’re a stand-up citizen who is capable of handling the credit/loans they have given you and they will look fondly on you.
But mainly, as your parents may have said to you at some point during a “we’re disappointed” lecture about “trusting you,” past behavior is an excellent indication of future behavior. If FICO knows you have been paying your bills consistently for the length of the account, they will think your gonna keep on keeping on. And that is good for you.
2. Your Credit Utilization: 30% of Your Score
Your credit “utilization” is the percentage of your borrowed credit that is available. So if your Discover card limit is $500 and you have a balance of $400 on that card you a) Are using 80% of your available credit and b) Shouldn’t be doing that.
Why, you may ask, does it matter how much of my credit limit I’m using if I can afford to pay the bill every month? Because even if you are capable of paying the bill each month (and how are you doing that by the way?), the fact that your credit card is close to maxed out will make FICO (the guy you want to like you) think your not responsible with credit.
In fact, they would really prefer your percentage of credit utilization to be 7 percent or lower if you want to be their best friend and between 10 and 20 percent if they are going to tell banks its okay to give you stuff.
This could be a hard one to follow if you have a low interest rate and are capable of paying the bill on a close to maxed out card, but because this factor makes up such a big wedge of the credit score circle you are going to have to work on it.
3. The Length of Your Credit History: 15% of Your Score
This is something that happens without you having a lot of control over it at all. In fact it is actually “impossible for a person who is new to credit to have a perfect credit score.”
But it matters to FICO just because the longer your credit histories (which includes the length of time each of your credit-based accounts have been open and the amount of time since their recent actions) the more data they have to look at on you. And then we see the past behavior indicating future behavior thing again, and without enough past behavior…you get the idea?
So, the only thing you can do today to improve your credit score if you have no credit history yet is to begin using credit (but wisely!). And for those who have credit, keep all your accounts open if possible.
If your bills are all going in on time and your balances are low, there is no need to close an account and doing so could actually damage your credit score if you close a long standing account, making your length of credit history very short very fast.
4. Your New Credit: 10% of Your Score
New credit is referencing when you attempt to get a credit card, or cards. Because every time you apply for a card a credit lender will put a hard inquiry on your credit report. And if you apply for five new lines of credit in a short period of time you will get five hard inquiries stuck to your credit report, and make FICO very nervous.
Why? Because even if you aren’t in financial trouble and desperately need a credit card this minute, they are going to think you do.
So you should only take out new credit when you really must or when you are financially able to do so.
5. Your Mix of Credit: 10% of Your Score
Credit comes in all shapes and sizes: credit cards, student loans, mortgages.
You see my lovely Victoria’s Secret Angel card up there? That’s a store credit card, which isn’t a stellar example of your creditworthiness, but I got it when I was 18 because they told me I would get 20% off that purchase and I was like “Ya, sure, sign me up.”
And even though I don’t have a current balance on it, the account is in good standing so I don’t close it because that would…?Shorten the length of my credit history! Correct!
Okay, so having a good mix of credit means showing lenders that you are a borrower who can responsibly repay a variety of debt. And if you do that FICO will tell lenders, “Hey, this kid is alright.”
End of lesson. Next time we talk credit, there will be a quiz. And we will talk about the best credit cards for every situation a post-grad could be in. Hooray!