Individual credit scores and what affects them can be a complicated and sometimes a mysterious part of personal finance. Debt is like fire, it can be a useful tool to cook food and heat things, but used improperly, it can be devastating. However, when used responsibly debt can provide many benefits that can positively impact individuals for being responsible. Developing habits like paying off the balance on a credit card in full every month and never spending more money on a card than an individual has in the bank can help establish a path to true benefits. If individuals do these things, the credit card company may pay them back with cash, miles, or other perks.

In order to dive into the nuance of credit score let’s break down all the parts that are included in the weighted consideration. The data that is accounted for in the calculation of credit score is grouped into five categories:

  1. Payment history (35%)– It is very important to always pay your credit bills on time and in full
  2. Credit Utilization (30%) – Keeping total balances as low as possible is the next best thing you can do. By utilizing under 30% of the credit line available to you, you will see your scores improve versus using over 30% of the credit available. This means if you spend $30 a month it is better for you to have a credit line of $1000 than $100 all else equal. Even though you are spending the same, the utilization as a percentage is less.
  3. Age of Credit History (15%)– This is the average age of all your credit accounts. The longer the history the better. When you cancel a card it not only lowers the average age of your credit history, but it also decreases the credit mix.
  4. Credit Mix (10%) – FICO considers the mix of types of accounts. It is good to have good standing with a mix of credit account types. Having over 10 different accounts open and in good standing will give you the best score.
  5. New Credit (10%) – Opening several new credit lines quickly will negatively impact your credit score. Hard inquiries stay on your report for up to 2 years, so try to space out your inquiries for new lines of credit far apart. Having one or two inquiries is minimally impactful but four or more can lower your score.

Whatever your personal finance question, do not hesitate to reach out to a Financial Advisor at Duncan Williams Asset Management. We can help advise you with budgeting, credit, social security, investing, and anything else that goes into your personal financial plan.

Author: Ben Gleneck


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