Your credit score……..what makes it score the way it does? If you pay your bills on time, you should be great, right? Maybe. The reality is that credit scoring is based on a number of factors that are proprietary to the credit reporting agencies. What does that mean? It means that the people who know the answer aren’t telling anyone else! Experian, Trans Union, and Equifax have a nice little monopoly and have every intention of keeping it that way.
That being said, here are some quick rules of thumb to keep in mind regarding your credit:
1. Payment History: Payment history has a 35% impact on your score. What does this mean? Simple, pay your bills on time. It’s not rocket science, it’s just the way it is.
2. Credit Balances: This is a fun one and it has a 30% impact on your score. In many ways it contradicts everything you’ve been told about credit. The scoring models have “tiers” that they search for in relation to your balance and your limit. The optimum ratio is 30%. Let’s say you have a $1000 credit limit, try to keep the balance at, or below $300. This makes the scoring models happy. The next level is 50%. 50% is sort of “no harm/ no foul” territory. Then there is 80%. You’re starting to look grim. And finally there is 100% or beyond. I think you know what happens there.
Typically you are told not to have too many credit cards. This is wrong. It is better to have several credit cards with little, to no balances. If you start going over the 30% limit, start using another card. I realize that it’s tempting to max out the 0% interest card, however it may be hurting your credit in the process.
3. Credit History: Credit history has a 15% impact. Just like anything else that’s worth anything, it takes time. Credit is a marathon, not a sprint. Follow these rules consistently and you’ll have an 800 score when you need it most.
4. Credit Type: This accounts for 10%. You’ll want to have a nice mix of credit on your report. The optimum blend is a car loan, a couple credit cards, and a mortgage. Too many of one or the other arouses the powers that be.
5. Inquiries: Inquiries have a 10% impact on your score. Each inquiry can cost you from 2 to 50 points! So next time you’re paying for your new sweater at the GAP, don’t fall for the 10% discount, it’s a hard pull on your credit.
Are these all the rules? No. Everyone has a different scenario. A credit report is a snapshot of your credit history at that exact moment in time. It can change tomorrow and not be anything like it was yesterday. However, by following these rules you should be on the high end of the spectrum. Your credit score can cost or save you a tremendous amount of money over your life. It is the great equalizer. The scoring models were created specifically to be non-discriminatory. They do not take into consideration age, race, sex, or religion. Everyone has a shot at a great score.