Credit Scores
If it starts with a c and rhymes with reddit, then you should never forget it! This week we are talking about credit scores, arguably your most magical personal finance number that isn’t in dollars.
Your credit score is on a scale from 300 to 850, with around 720 being the median score. It essentially measures your trustworthiness as a buyer by weighing different aspects of your financial history in borrowing. This article is going to break down how to positively influence the credit score by explaining the weighted breakdown of its calculation.
payment history (35%) - this is the biggest factor and entails repaying your bills on time and in full.
amounts owed (30%) - this factor has the next biggest impact and is basically the total amount of debt you owe at any point.
length of credit history (15%) - this component is how long you have had credit, which helps a lender to trust that you are experienced and more likely to pay future loans back.
new credit (10%) - when you input inquiries to get loans, this drops your credit score. This is because it is viewed negatively to borrow lots when already in debt, since that often appears as if a person is trying to borrow in order to cover the existing debt.
credit mix (10%). - Creditors generally believe that a person managing different types of lines of credit and loans is less risky to loan to. This is because having a variety of types of loans makes you seem more likely to pay things back. However, taking on lots of different types and not paying them back will hurt other parts of your credit score.
Do some uncomplicated math and you find that the payment history (35%) and the amounts owed (30%) make up a majority of the weighting. This means that the most significant things to focus on in having a good credit score are repaying bills on time and limiting how much debt you take on at any point.
Though this might not feel relevant to you today, whether it is buying a car, renting an apartment, or even applying for a job, your credit report and score will be a crucial part of your financial future and it’s important that you know how to maintain a good score long-term!