People right on the brink of adulthood are expected to start learning how to handle their finances properly. Maintaining a good credit score is an essential chapter in that book, right before the one on how to use a swift code to complete international wire transfers.
Now, a credit score is a three-digit number that typically ranges from 300-850. It basically gives banks – in this context, they’re usually called ‘lenders’ – an idea of your creditworthiness. The higher your credit score, the more likely you’ll get that loan or credit card.
FICO (formerly called Fair, Isaac, and Company) is the data analytics company that came up with the criteria that most banks use to compute for credit scores. If you wish to have a high score, take note of the following FICO factors:
1. Payment History (35%)
Bad payment behavior, such as paying late or skipping payment altogether, can have a substantially negative impact on your credit score. Seeing that this is the criterion with the most weight, it’s important that you always pay the whole bill on time, no matter how tempting it can sometimes be to let it all pile up for a while.
To ensure that you never miss your monthly bill payment, the most convenient thing to do would be to set up an automatic payment system. However, if you’re not comfortable with that or if it’s just not an option for you, you can also input the deadlines in your calendar.Setting up multiple reminder schemes such as post-it notes on bulletin boards is advisable if you’re really forgetful.
2. Current Debts (30%)
Your credit score is guaranteed to decrease if you keep maintaining a lot of unpaid debts. It’ll dive even lower if you have balances on multiple cards. To avoid the troubles of having to fix your score, try to stick to the number of credit cards that you actually need. For most people, one or two should be enough.Additionally, you could try to leave your credit cards at home when you go out. This way, you won’t be tempted to purchase plenty of unnecessary items on impulse and consequently damage your credit score.
3. Credit History (15%)
First off, the length of time in which you have had your credit account open is directly proportional to your credit score. In other words, the longer you’ve had your account open, the better. Take note that this is only a general rule, and that it’s still amenable to change depending on your payment history.
So, even though you’ve had your credit account for, say, 12 years, if you often miss or are late with payments, then you shouldn’t expect a high score. It’s better to have a credit account open for a short time as long as it reflects a good payment history.
4. New Credit Applications (10%)
The fourth thing to consider when calculating your credit score is how many new accounts you’ve opened within the past 12 months. Lenders look into this because the governing principle is that the more credit accounts you’ve opened recently, the more you’d have to pay off. So, if you can, think ahead and try to limit the number of credit accounts you open in a year.Another thing to note: multiple inquiries into mortgage rates and other types of credit accounts usually count as one, since lenders assume that you are just sourcing your best options. This is also known as rate-shopping.
5. Types of Current Credit (10%)
There are three main types of credit:
- Revolving, which includes credit cards and home equity lines of credit;
- Installment, which includes student loans and mortgages, and;
- Open, a combination of a revolving and installment credit, is not commonly known and, hence, isn’t frequently used.
Although having different types of credit may be beneficial for your credit score, it isn’t that necessary. It just shows your potential lenders that you’re capable of handling different kinds of accounts that each have its own payment scheme.
Now, if you’re thinking of applying for a type of credit that you don’t need in hopes of bumping up your credit score, don’t. It’s isn’t available to do so because you won’t really be using them.
Among the many benefits of having good credit are low interest rates and more negotiating power. That generally means that it can help you save more money in the long run and have more opportunities for financial growth. Just remember to prioritize paying your bills on time and clearing your debts as soon as you can, because just those two already make up 65% of your score.