The Alchemy Of A Credit Score

Welcome back, witches, wizards, and all you magickal beasties! This week we’re talking about what goes into the brew of your credit score!

Double, double, toil and trouble, FICO burn and cauldron bubble!

(Sorry, friends. You’re dealing with a theatre kid here, and I will never change.)

Daniel! What makes up my credit score??

Well, pals, there are five big ingredients to a credit score! The most significant piece of the pie is your payment history, clocking in at 35% of your total score. Basically, are you making your monthly minimum payments on time? Again, this was a big surprise to me as a newbie to personal finance. You don’t have to pay everything off in full each month for a stellar credit score, but it is essential that you make at least those minimum payments! Late payments stay on your record for up to seven years, so do whatever works for you to help yourself remember to make those payments on time!

The next biggest piece of the credit score quiche (I got bored of pie) is credit utilization (30%). Credit utilization refers to how much you owe vs. how much you could owe. For example, let’s say you have a credit card balance of $3,000, but your total spending limit is $10,000. Bust out that calculator and enter 3000 / 10000 = 0.3 or 30%. That percent ratio is also called your utilization rate! I use that example because creditors dig it when your utilization rate is low, preferably under 30%. Under 10%? Look at you, you rock star.

15% of your score is your length of credit history! Essentially, the longer your credit history, the better. Your length of credit is actually an average of how long your various accounts have been opened, so if you have to close a card, try and close the newest accounts instead of your old cards with that good, beefy credit history.

Type of credit accounts for 10% of your score. This means that it’s good to have diversity among your types of credit! Credit cards, mortgages, car loans, student loans, etc. all count towards having a good party mix of credit. (Note: we don’t recommend taking on new debt just to diversify your credit!)

And, finally, we have inquiries, which makes up the final 10%! It’s cool for you to check out your credit score as often as you like, which is also known as a “soft inquiry.” Those stay on your credit report for a year, but don’t actually influence your score at all. They’re mostly just reported so that you can make sure it’s YOU who’s checking! On the other hand, a hard inquiry happens when you consent to SOMEONE ELSE (like a potential lender) checking your credit score. This kind of inquiry stays on the report for two years and does become a part of your credit score, so anyone who pulls your credit can see it. These hard inquiries are something important to consider when getting new debt or opening new credit cards!

Well there you have it, folks. The perfect recipe for a tasty, tasty credit score. Now if you’ll excuse me, all these food metaphors have made me hungry, and it’s time for a snack.

Ready for a full buffet of credit score knowledge? Be sure to check out our Crush Your Credit mini course. See you next month, friends!