What is Your Credit Score?

Your credit score is a 3-digit number that creditors use to determine your credit risk, based on five (5) components:

CreditScorePieChart

 

  • 35% of your credit score is based on your payment history. Professors don’t like to receive assignments late, and your creditors don’t either.  Are you paying your bills on time, or spending frivolously and living care free?  Accounting for over 1/3 of your credit score, paying your bills on time is one of the most important steps you can take to impress the faculty and maximize your credit score.  Derogatory items like late payments, collection accounts, charge-offs, liens, judgments or bankruptcies will significantly lower your score, and can remain on your report for 7-10 years.
  • Amount Owed – 30% of your credit score is determined by your level of debt. Do you take on more expenses than you can handle, relying on others (namely your creditors) to pick up the slack?  Although your credit is there for you to use, multiple loans and maxed-out credit cards indicate your budget may be over extended, which will lower your score.  Outside of making all payments on time, keeping your credit card balances low is a key way to maximize your credit score.
  • 15% – Length of Credit History.  As with many relationships, true success is measured over time.  Are you a “one hit wonder” or are you able to manage your debts responsibly over time?  The longevity of your accounts helps creditors better measure your spending behavior.  When it comes to credit card accounts, the older the better.
  • 10% – New Accounts. When it comes to your credit score, it doesn’t always pay to shop around.  Whenever you apply for new credit, it creates a hard inquiry, and too many hard inquiries will drag your score down.  Multiple inquiries for major purchases (such as a mortgage or auto loan), within a short period of time, will usually only count as one inquiry.  When applying for credit, it’s best to do your research and apply selectively, keeping new inquiries to a minimum.
  • 10% – Type of Accounts. Just as a well-rounded student must master different subjects, creditors like to see that you can manage different types of credit.  Having a diverse mix of accounts in different categories – mortgage, auto, revolving credit, installment loans, etc. – will let creditors know you can multi-task and boost your score.  Not all types of accounts will benefit your score.  Consumer finance accounts are usually reserved for those considered to pose a higher credit risk.  As a result, these accounts may lower your credit score, even if the accounts are in good standing.