So, you’ve opened a line of credit. Don’t panic! Credit scores can be scary to a newcomer, but they are simple once you get the hang of it.
Having a good credit score can save you money in the long run by saving you future APR and interest rates. Understanding and being responsible your credit score will be a saving grace in the long run.
What Makes a Credit Score?
Your credit score is comprised of five different factors.
- 35% payment history
This is the most important part of your credit score. It analyzes when all of your credit bills are paid, and how much of the bill is being paid off. It is absolutely essential to always pay your credit card bill on time and best to pay in full.
Late bills will detrimentally impact your credit score, so guarantee that you know when to pay your bill. Better yet, schedule an automatic payment for your credit card bill. Paying early means less interest, so it is in your best interest to pay your bill as soon as you can.
- 30% credit utilization
This analyzes how much of your credit limit that you are using each month. It’s best to keep your credit utilization around 30%. That means if your credit limit is $1,000 every month, you are only using $300 or less.
Be sure you are following this rule with all of your credit cards!
- 15% length of credit history
Having a longer credit history will help you in the long run, but everyone has to start somewhere. If you are just opening your first line of credit, be patient. This aspect of your score will go up in time.
Be responsible with your credit from now until the end of time! Closing a line of credit will hurt your score, so never close a line of credit if you can help it.
- 10% new credit
Be careful when applying for new credit. Every time you apply, companies will conduct a hard inquiry which negatively impacts your credit score. Only apply for new lines of credit when you are sure that you need them.
It is best practice to wait at least six months in between new credit applications.
- 10% credit mix
Your credit score is positively impacted by diverse credit. If you have a mortgage loan, student loan, and a credit card can demonstrate your ability to manage different lines of credit.
What is a “Good” Credit Score?
FICO credit scores range from 350 to 850. Again, your credit score is calculated by the factors listed above. Here is how FICO ranges credit scores:
- 800 – 850: Exceptional
- 740 – 799: Very Good
- 670 – 739: Good
- 580 – 669: Fair
- 300 – 579: Poor
There are a few different types of credit scores, but most lenders look at your FICO credit score, so take it seriously.
You may have heard the common misconception that checking your credit score will hurt your score- that is not the case. Knowledge is power, check your score to understand your credit.