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Jun 21

About credit scores

Over the past few days, I have gotten a barrage of questions about credit scores. Okay, it was two, but ’round these here parts, that counts as a barrage. There are a fair amount of urban legends regarding credit scores, and nobody outside the companies that create these scores knows every detail, but most of the information is pretty straightforward. And while there are a few different companies out there that can assign a score, the largest and best-known is Fair Isaac, which publishes the FICO score, based on reports from the three major credit agencies.

Your FICO score (which will simply be referred to as your “credit score” for the rest of this post) is made up of five factors and comes in a range of 300-850. A good score is about 740ish+, although different lenders obviously have different standards. I’ve seen data indicating that 720 is good enough, but I like to give myself a buffer. I have attached a chart that breaks down the criteria, but just in case:

Screen Shot 2015-06-18 at 9.06.14 PM

35% of your score comes from credit history. Self-explanatory. Pay your bills on time and not only will you save yourself interest charges but you will also boost your score.

30% of your score comes from utilization. In other words, what part of your total outstanding credit do you use. Ironically, opening a new card can eventually help you with this statistic, since the denominator will be higher. For example, if I have five cards with $20,000 credit lines each and spend $5,000, my total utilization is 5%. It’s also the reason that I don’t close old cards even if I don’t use them (I do cancel those with an annual fee.).

Pay your bills on-time and don’t max out your cards every month and your credit score will be strong. That’s the best advice I can give you.

15% of your score is based on your length of credit history, including the age of your oldest card and average age of accounts. That’s another reason not to close accounts that don’t have a fee.

10% is based on the types of cards you use. Do you have a history with both revolving credit, such as a credit card, as well as installment loans, such as mortgages or car loans.

10% is based on “recent inquiries.” People tend to concentrate on this number, even though it is a small portion of your total score. Per myFICO:

MYTH: My FICO Scores will drop if I apply for new credit

TRUTH: If they do, they probably won’t drop much. If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
It’s not hard to find your score. You can use the tools at the bottom of this page to get your actual FICO score or a free estimate through Credit Sesame, but you may not even need that, since many credit cards will give you free access to your score.

 

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