Accessing credit on reasonable terms is a key factor in managing our financial lives. Mortgage lenders, credit card issuers, cell phone carriers, etc. consider your credit score is as part of your overall financial picture as it helps the lender manage their risk. But what goes into that number?
As a starting point, your credit score is just a three-digit indicator of your history and capacity for handling debt. It is not your full report, which details your credit-based accounts, current and past payment patterns, etc.
Age, income, employment status and history do not directly affect your score, but they may influence lenders offering some types of credit.
Different credit reporting companies score differently, but FICO scores are most common. They range from 300 to 850, with 750 or better easing your access to credit along with more favorable rates and terms. A few things to keep in mind:
Timeliness matters. Lenders are leery of any tendency to be tardy with payments. FICO cites it as the biggest factor (35%) in a credit score.
Moderation is also a key factor. FICO stats the level of outstanding debt is the second largest factor in assessing your credit score. Experts suggest keeping balances on revolving debt below a third of applicable limits and paying down large credit purchases more quickly. If you fear that you may be over-extended, your financial advisor can help evaluate your debt and set a strategy for managing it effectively.
Take your time in building. How long you’ve used credit, the age and usage of various accounts represent about a 15% factor in your score. It takes time to build a credit history, but responsible use and timely payment practices can start immediately. Also be cautious about opening too many new accounts in a short time but don’t worry if you are simply rate shopping, as only the account on which you actually take out the loan should show up on your credit report.
Diversity matters. Lenders look for an ability to manage different types of credit (credit cards, retail accounts, car loans, mortgages, etc.). Don’t open accounts needlessly, but experience across multiple categories can boost your score.
Don’t worry about checking in. Feel free to check your number; it does not lower your score. Primary credit bureaus such as Experian, TransUnion, and Equifax may charge a fee, while online services offer a free check to grab a bit of your data. Bank and credit card companies may offer customers a free credit score check.
If you have further questions about how to manage your credit as part of your overall financial picture, ask your financial planner. We’re happy to help!
