How Is My Credit Score Determined?
An important first step for building credit is knowing the rules of the game and what is considered when calculating your credit score. Just like most situations in which a score is calculated, once you know what you need to do to earn points, you can develop a plan for reaching a high score.
What is Counted Toward My Score?
1. Payment History
Your record of making payments is a major factor in calculating your credit score. Making payments on-time helps your score. Missed or late payments hurt your score. Always do your best to make at least the minimum payment due on credit cards or other lines of credit monthly.
2. Credit Usage
The amount of money you owe in comparison to the amount of credit you have available impacts your credit score. Always strive to keep the amount owed at 30% or less of the amount of available credit. For example, if you have a credit card limit of $300, you should work to keep the balance less than $90. Using more than 30% of the available credit can hurt your score. Similarly, keeping the balance at less than 30% of the available credit or paying off the balance each month can help improve your score.
3. Length of Credit History
The length of time that your accounts are open is a factor considered in determining your credit score. Accounts being opened for a long period of time help your score.
4. New Credit
A hard inquiry on your credit report reduces your credit score. Generally, a hard inquiry occurs when you apply for a new line of credit, such as a credit card, auto loan, or mortgage loan, and the lender accesses your credit report to determine if you are eligible for the loan. So, keep in mind that applying for new lines of credit can negatively impact your credit score. This is different from a soft inquiry, which does not impact your credit score. For example, it is generally a soft inquiry when you access your own credit report for review.
5. Types of Credit
The types of credit accounts that you have open impact your credit score. It is helpful to have a mix of various types of credit accounts open. This could include a mortgage loan, student loan, vehicle loan, and revolving credit (such as a credit card).
Develop a Plan for Building Your Score
Now that you know the rules of the game, you can develop a plan to reach a high score. Review your credit report and determine what is currently being reported. You can access your free credit reports through all 3 major credit bureaus (Equifax, Experian, and TransUnion) through annualcreditreport.com. Then, you can determine things that you can do to build your score, such as making on-time payments, reducing your credit usage, continuing to maintain existing accounts, avoiding applying for too many new lines of credit, and mixing up the types of accounts you have open.
Learn More About Credit
For the entire month of March, Financial Freedom Legal will focus on credit awareness. Each week, we will share a new blog post with news you can use about credit.
You are also welcome to join us and mortgage loan officer, Lynn Bossi-Kinsel, on March 22nd at 6:00pm for a free event to get answers to your questions about how credit scores are calculated, how to build and rebuild credit, and what mortgage companies are looking for when reviewing your home loan application. For more information about this event visit https://fflegalva.com/event/behind-the-score-credit-building-homeownership-and-more/.
You can also reach Steve and Vee anytime at 804-FREEDOM for additional information.
