The Three Digit Number: Credit Scores
Your credit score is a three-digit number ranging from 300-850 that seems to have all the power when it comes to your personal finances. Did you know that according to Experian, in 2019 the average FICO score of individuals between the age of 20-29 was 662.? For lenders, it is the main factor they consider to determine if you are trustworthy for a line of credit and will pay them back. Some consumers avoid looking up their score, while others are constantly trying to increase their score through various methods. If you’re wondering why having a good credit score is so important and the factors impacting your score, DWM has you covered.
So why is having a good credit score so important? For renters, it could be the difference between putting a security deposit down of $500 versus a security deposit of 1.5 months’ rent. For people looking to buy a home, it could be the difference between a $1,200 mortgage versus $1,400 a month over 30-Years. That difference comes out to roughly $85,000 more in interest over 30 years on a $200,000 mortgage...check out this chart from Forbes below.
And if you’re applying for a new credit card, it could be the difference between getting a good APR like 18% versus receiving a +25% APR. Ultimately, having a good credit score is important because it puts money back into your pocket. It decreases the amount of interest (or deposit) that you are charged when it comes to borrowing money. And at some point, in time, we will all borrow money. Might as well have the best rate when that times comes!
The way your FICO credit score is calculated isn’t as complicated as you might think. It is not a secret formula like the Coca Cola recipe that only two people in the world know about! In fact, it is actually just five factors that are considered in the credit score calculation:
Payment history: This factor considers all of your payments that have been made over the life of your credit. This includes both on time payments and late payments. Even one late payment could hurt your score so consider turning on auto-pay or payment reminders to avoid that headache. This accounts for 35% of your score.
Credit utilization: Utilization is the total amount of credit you have versus the amount of money you owe. The lower the utilization, the better. Just because you have a $5,000 credit limit does not mean you should max it out. Try to keep your credit utilization below 30% to get the best results for your credit score. This accounts for 30% of your score.
Length of credit history: The longer you have had your credit, the better. So, if you recently got your first card and are wondering why you are not at an 850 yet, give it some time. This accounts for 15% of your score.
Type of credit: The credit bureaus consider this as the “mix” of credit. Your mix could be a combination of retail cards, mortgages, car loan. However, since your mix only accounts for 10% of your score I wouldn’t recommend trying to mix your credit just for the hell of it.
New credit inquiries: Remember that time you applied for the Target Red Card to receive 5% off that purchase? Target requested your credit report which in return may have had an impact on your score. The more inquiries/credit requests you have over a short period of time, the more likely a negative impact on your score. It could indicate that you are thirsty for credit. And we all remember the days where being thirsty was not good. This accounts for 10% of your score.
Knowledge is power! Knowing the different factors that make up your credit score will allow you to shoot for that perfect 850 score that everyone wants to have. Remember, turn on those auto pay or payment date reminders and keep your credit card balance low. While you're at it, download the Credit Karma app so you can always have your credit score at your fingertips (Its FREE and your score will not be affected by checking it). As always, I want to hear from you! Do you know your credit score? What is one thing you'll do differently to boost your score?
Holding you accountable,
DWM