Credit Score

The world of credit can be confusing and daunting at times. Hopefully this can pull back the lid to show the cogs of how the credit system works to spit out that oh-so mystic credit score. There’s six factors that go into forging your score (listed below), and when managed well can increase your score to significant heights (From 300 to the coveted maximum score of 850). Each factor has a different level of impact (either high, medium, or low), that determines how much it affects the score. You can try to manage them all, but don't stress out too much over it. There's really two factors that, if you focus on taking care of them, then the others will fall into place with time. And that's your credit utilization and on-time payments. I’ll go into a little more detail on each:

Credit History:
This is the average age of all of your accounts. If you have one account, your history is however long that account has been open. Let's say you had the account for one year when you decide to open another account. Your credit history would fall to six months because it averages your two histories. The more accounts you have, and the longer you keep them active, the less new accounts will impact your credit history. Not much you can do to increase this...other than wait. How boring right?

Number of Accounts:
This is the number of active accounts that you have in your name. The more accounts, and the more diverse types (auto loan, home loan, certain bills, credit cards, etc.) The better it looks on your credit, because it shows you can manage multiple lines of credit. Having multiple credit lines has another benefit of increasing your overall credit line (More below). A "good" amount of accounts is basically more cards than you'll ever need. So my rule of thumb is a good amount of accounts is the amount of credit cards you're comfortable with that you feel you can manage without undue stress. If that's one, then just have one! It's a low impact factor so having a bunch of accounts isn't super important.

Hard Inquiries:
This will be the number of applications you've submitted for loans or lines of credit. After two years the mark will fall off. These marks will get added even if you're denied for the line of credit. Getting pre-approved is a huge bonus, and if you're just starting out you can get a secured card instead of a unsecured (I'll make another small post about the differences of those for anyone interested). Try to keep this under five. Mine usually hovers around 2 because I have no self control and shiny cards with sweet sweet points sabotage me. Onward!

Derogatory Marks:
These are any remarks you have from creditors against you. It can be that you're late on a payment, didn't pay, and this is where bankruptcy claims show up. They're long lasting marks against your account (seven years!), but they're one part of your credit score that's negotiable. You can call the person you owe money to and ask to work out a repayment plan if they're willing to remove the mark against you. These can really harm your score, so it's important not to overextend on something you can't afford to pay back. You don't want any of these. Do not try to outdo your friends on these, hold your own beers.

Alright, so those are (in my opinion) the easy ones to manage, because there's not much that you can do other than wait for time to pass or not upset people by not paying them. The other two I mentioned, the factors that if managed properly the others will fall into place. These are the important ones to listen to.

On-Time Payments:
Pretty easy, but very important! It's the percentage of times you have paid on time. You want this to be 100%. If you can't make the full payment, try to make the minimum at least. If you miss one payment you need 100 months of on time payments just to get it to 99%. That's over 8 years of on time payments if you have one credit card! If you have multiple credit cards, or lines of credit, then each month you pay them off on time you get a point added to your total payments (five cards adds five on time payments each month, as long as you remember to pay them all, haha.)

TL;DR Pay all your cards on time and there's nothing to worry about!

Credit Utilization:
Put simply this is the amount of credit you do use vs. the amount of credit you can use. If you have a $50 balance on a $500 credit card you have 10% usage (it's 50/500). If you had that same $50 balance on a $5000 card it would mean you have 1% usage (50/5000). Utilization adds all your cards together, so if you have cards with $500, $2000, and $5000, then your total credit available is $7500. Keep this number as low as possible, 0% even. Lenders love people who have credit, but don't need it. That doesn't mean don't use your cards, just payoff the balance in full each month and it'll keep your usage at 0%. I like to pay mine off a couple days after I use it just to make sure I don't forget.

P.S. You don't have to use your card constantly or carry a balance to show utilization. I've let my cards go a couple months without using them, and I've never carried a balance (which means a fat $0 in added interest) because I only use the cards to buy things I could with cash anyway. Just one purchase every couple of months is enough to show activity, just don't go too long without using the card or it could get closed out automatically from inactivity. And that'll lock in the age if that card on your credit history.

That's about everything I can think of that I've learned about credit over the years, and it's what I tell everyone who asks me about it at work (I'm a banker, and long winded). I'm no certified expert, and thus I feel inclined to add the whole shpiel about consult people with certificates, don't base everything you know on a guy from the internet, I'm not responsible for crazy actions, yada yada. I can make other posts looking at what creditors look at when you apply for credit in the first place, and that sweet sweet points system for anyone interested. I'm leaving the list with the impact levels below. Hopefully this helps!

My FAVORITE app for tracking credit is Credit Karma. I love them and I've used them for years and love referring them (and I don't even get paid for it!). Super easy to use, and it doesn't hurt your score when you look, and I check like every other week so that's good for someone like me.

Credit Score Factors:
Credit History (medium impact)
Number of Accounts (low impact)
Hard Inquiries (low impact)
Derogatory Marks (high impact)
On-time Payments (high impact)
Credit Utilization (high impact)

Most of this stuff is from personal experience and bits and pieces I've picked up over the years, but I did reference Credit Karma's app for a couple things like impact types. (They're great use them...)