What Affects Your Credit Score?

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In the wake of the data breech of Experian, one of the companies that compiles our credit scores, last week, I discussed why our credit scores matter.  Today, let’s discuss what affects credit scores.  Your actions could be affecting your scores without even knowing it, whether harming or improving.

What affects your credit score?

Your credit score is based upon your credit and payment history.  Note that the best scores do NOT come from being debt FREE, but from how well you manage debt over an extended period.  Different scoring models differ in how they create your score, but all use the same factors.  Here are the most important.

Credit card utilization – The percentage of your available credit limit that you are using.  When your balances (including current month charges) exceed 25-30% of your total available limit, your score drops.  To avoid problems, you can pay down your balances or increase your credit limit.  Never using your credit cards also hurts because you don’t show a record of responsibly using and managing credit.  This can account for 30% of your FICO score.

Payment history – Payment history is one of the biggest components of your rating since it can account for 30-35% of your FICO score.  Even one late payment can mean a big drop in your score and remain on your history for seven years.  Consider using email or calendar alerts to avoid late payments.

Average age of open credit lines – A longer credit history reflects more responsibility in managing good credit while a short history reflects more uncertainty.  Opening a new card or closing an old card can therefore shorten your average and lower your score.  This can be 15% of your FICO score.

Credit inquiries – Whenever you apply for a new loan or credit card, you drop a few points.  The exception is when you apply for several auto or home loans to compare rates within a 30 day period.  Checking your credit score does NOT affect your score.  This can account for 10% of your FICO score.

Types of accounts – Many accounts show many creditors have approved your credit.  It is useful to have several types of accounts, both revolving and installment.  This may be 10-15% of your FICO score.

Debt problems – Debt collections, bankruptcies, liens, foreclosures, and even short sales of underwater homes will severely damage your credit rating and stay on for 7-10 years.  Obviously this is not the best way to show potential creditors that you are a good risk.  However, bad financial situations happen and it is possible to recover from them by rebuilding a good credit history over time.

https://www.creditkarma.com/myfinances/simulator/index/ref/tools – The Credit Score Simulator lets you see how various financial actions could affect your credit score over time.

Note that if you co-sign someone’s loan or credit card, both signers’ credit rating will be affected by the actions with the loan or card.  This means that both names on a credit card will be affected by the actions on that card.  Putting a child’s name on your credit card is an effective way to build a good credit history for the child who can get their own card at age 21 with an established credit history.  Co-signing a relative’s loan could affect your credit score if your relative fails to pay, (plus you still have to pay.)

Next time, we’ll review how you can improve your credit score.

About John Kimball

Over the past few decades, I have experienced most of these financial issues with both mistakes and successes. I sure wish someone had told me these things when I was first starting out. So many times I have cried out, "I want a do over!" when I learned a new financial lesson or tip. I aim to pass along to you the financial insights I have gained from experience, reading, analysis, and living the financial aspects of managing, saving, investing, and spending your money. I am an analyst with a large organization and happily married with two children on their way to an expensive college, no doubt. I read numerous financial blogs, websites, newsletters, magazines, newspapers, and books to bring you the latest news, insights, tips, and lessons combined with decades of experience.

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