Understanding Your Credit

Your credit score, what it means, and how it affects you: 

 

Your credit score is your "creditworthiness" in the eyes of a potential lender. This includes dealerships, banks, mortgage lenders, home rentals/apartments, credit card companies, etc. It is a way to determine whether you are likely to pay lenders back if they give you money. 

Your credit score can range from 300 up to 850. Of those points, there are 550 possible points that *you* control over five different categories: 

1. Payment History or REPORTED on-time payments  is worth up to 192.5 points (35% of your score)

 
Your payment history is the largest factor in keeping your credit profile at its best. You need to have at least 100% on-time payment history reporting across ALL accounts for more than 12 consecutive months to earn all 192.5 points.

2. Credit Utilization — or the amount you owe — is worth up to 165 points (30% of your score)

Your credit utilization is determined by the amount you owe across all of your revolving accounts. To earn all 165 points in this category, you would need to keep your overall utilization under 3% for over 6 months. Anything over 30% utilization cuts your points by almost HALF. 

3. Credit Age, or the length of your credit — is worth up to 82.5 points (15% of your score)

Your credit age is determined by calculating the AVERAGE AGE that your accounts have been opened.

 

Anytime you:
 

- close an account

- have an account deleted

- open a new account

YOU LOSE CREDIT AGE. 

This section has a huge part to play in why your scores fluctuate (going higher and lower) during the credit repair process. 

It is estimated that an average account age of 12+ years will earn you all 82.5 points in this category. It is important to keep your credit age in mind when applying for new accounts. Seek out accounts that you intend to keep long-term when possible. 

4. Credit Mix  or the types of credit you have  is worth up to 55 points (10%)

Lenders prefer consumers who show they are responsible handling various types of accounts. Below are some examples of types of credit: 

a. Installment — refers to a loan for a set amount of money with a repayment schedule that occurs regularly. (EX: student loans, mortgages, auto loans, personal loans, etc.) 

b. Revolving — a line of credit that you can borrow freely from but has a limit. (EX: credit cards, lines of credit, etc.)

c. Charge Cards — a form of "open credit" that must be paid back in full each month. They are not to be confused with credit cards. 

5. Inquiries the hit you take to your credit each time it is HARD pulled/reviewed by a lender — are worth up to 55 points (10%)

There are two types of inquiries: hard inquiries (which require your consent to pull and affect your scores) and soft inquiries (no consent needed/no affect on your credit score). 

Over 3 hard inquiries will forfeit more than half of your 55 points.

After two years, inquiries typically fall off of your credit report and after one year they generally stop affecting your credit score. Even so, if it very important to limit the amount of new credit you apply for. 

Examples of hard inquiries: credit card applications, auto loan applications, mortgage applications, having your credit checked to rent a home/apartment, personal loan applications, etc. 

Examples of soft inquiries: background checks, pre-approvals, renting a car, checking your own credit via sites like Credit Karma, etc. 

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Image Credit: Credit Repair Cloud