A credit score? Let’s unpack what goes in it

Dreaming of that apartment you saw on Pinterest? Or that Tesla that raced past you on the street the other day? You’ll need a credit score! But what is that and what goes in it?

A credit score is a number from 300 to 850 that predicts how likely you are to pay back loans on time.

Like the grades you get in college, your credit score is a grade for your financial performance. The “professors” who care about this grade include banks who set your interest rates, insurance companies who determine your monthly payments, landlords who decide whether to accept your rent request.

There are many different credit scoring models that may give you different credit scores. But the most common one in the US is the FICO score, produced by Fair, Isaac Corporation.

The FICO score is made up of 5 factors:

1. Payment History (35%)

This is the most important factor. It looks at whether you’ve made your credit payments on time in the past. Late payments (especially reoccurring ones) will damage your score.

2. Amounts Owed (30%)

This factor looks at how much of your available credit you actually use (in other words, your credit utilization). It’s often recommended to use ~30% (e.g., if you have a $1,000 credit limit, then you should use ~$300).

3. Length of Credit History (15%)

This measures how long you’ve had credit accounts for and how long it’s been since you used those accounts. The longer, the better.

This is also the reason why you should get a credit card as soon as possible!

4. New Credit Accounts (10%)

This factor looks at the new credit accounts that you open. When you open too many credit accounts in a short period of time, this decreases your credit score.

5. Types of Credit (10%)

This considers how many different types of credit accounts you have (e.g., credit cards, mortgage loans, car loans, etc.). Maintaining a good mix of accounts shows that you can manage many types of loans, and this ultimately improves your credit score.

Remember to responsibly manage all these 5 factors so that you can get that Tesla!

Sources: FICO


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