Credit Scores: Five Important Factors You Need to Know

Credit Scores: Five Important Factors You Need to Know

What is a credit score and why do I need it? 

Consumer credit allows consumers to purchase goods or services now and pay with or without interest later. 

The most common form of consumer credit is a credit card. Personally, I like and use credit cards to my advantage. I believe that consumer credit cards, if used correctly, can provide the pathway to bigger purchases at less cost. 

However, if you’re not careful, consumer credit can get you into deep financial trouble very quickly. That is why it is important to know five factors of how your credit score is calculated and the tips to get the most out of each category. 

1. Overall Payment History: Paying on time is most important. A number of late payments and/or delinquent amounts will decrease your credit score. Past and current collections and bankruptcies are also contributing factors. To enhance your credit history, find a way to work with your creditors to come up with a payment plan. The longer you pay on time, the better your credit score becomes. 
    
2. The length: The longer you’ve been using credit, the better. Try not to close any credit cards, especially the one(s) you've been using for awhile. If you have not used a credit card for more than a year, a lender can close your card due to non-activity. Closing a credit will decrease your score. Stay strategic and get your cards to work for you. Maybe have a phone bill charged to this credit card, then pay as soon as it is charged. 
    
3. The amount: Many people get excited about their credit cards and use the maximum amount. The secret to a good credit score is to use less than 40% of your credit limit. That is why it is better to have more than one credit card, but only use less than half the amount available. 
    
4. Newest activity on your card:. Lenders will consider you a bigger risk if you open several credit cards in a short period of time. It will decrease your credit score. Another factor is inquiry. Even though your credit score considers inquiries in the last 12 months, you want to be careful how many inquiries you have on your account. How do you shop for a better interest rate for a home mortgage or car loans without lowering your credit score? Shop within a 14-day window. 
    
5. Mix of the types of credit you have. The mix includes consumer credit such as credit cards (like Chase or Citibank) and retail accounts (like Amazon or Costco), loans (car or student loans, line of credit), and mortgage. 

These five factors not only calculate the credit score, but also form your credit report. As a consumer you have the right to know what your credit report includes. I will talk about how to pull and monitor your credit report, as well as the advantages and disadvantages of your credit in the next few months. This will make sure credit is working for you and your bigger dreams!

Article by Dr. Lily Davidov