Credit Score Components
Your credit score is made up of five different factors. These include:
Your Payment History (35%) — Your payment history shows your history of on-time payments, delinquencies, and anything found on public records. Your payment history is the biggest factor in determining your credit score, which is why it’s important to pay your bills on time.
Balances (30%) — This shows how much you owe on any accounts, including credit card debt, student loans, and more. It’s best to keep this amount low.
Length of Credit History (15%) — How long you have had accounts and time since account activity. The longer you keep accounts open, the more this score will improve.
Types of Accounts (10%) — This includes various accounts you may have, including student loans, retail and credit cards, and car loans. Managing a variety of different types of credit may help boost your score.
Recent Credit Activity (10%) — If you’ve recently opened several accounts or applied for new credit, this could lower your score. However, if you’ve had the same type of accounts over a period of time and pay regularly, this part of your score will go up.
Why Care About Your Credit?
Even if you never want to own a credit card, can pay off everything in cash, and abhor debt, your credit score still matters. Being able to prove your creditworthiness to lenders is incredibly important.
Your credit score is used for more than just approving you for credit cards. You may never plan on having a credit card, but you will need a strong score when you:
- Apply for any type of loan (car, student loan, home loan)
- Apply for your own apartment, particularly in a competitive area
- Apply for some jobs (though it’s important to note employers can check your credit report, not your specific score)
While a bad score (or questionable report) won’t automatically mean you’re denied in any of the above scenarios, it can mean you’re treated differently by certain lenders. Those with low credit scores will likely be offered higher interest rates on loans, and this has a real impact over the lifetime of something like a mortgage. You’ll pay significantly more in interest than someone who has a good credit score.
And if you want to rent, some landlords may deny your application based on your score. In competitive areas where units rent quickly and have multiple borrowers putting in applications, the people with the best credit scores may be favored because they appear to be more financially reliable.
Whether this is fair or accurate or not, the fact remains that a variety of institutions use your credit score and reward individuals with better scores. Even if you’re not a fan of credit, it pays — sometimes literally, in terms of savings on things like interest — to maintain a good score.
How to Get Your Credit Score
Federal law mandates your right to a free credit report annually from each of the three credit reporting agencies. Unfortunately, we don’t have the same right to a free credit score. While you can determine a great deal from your credit report, including any identity theft or incorrect information on your report, it doesn’t give you your three-digit score.
Here’s the good news: there are still a few ways to get an estimate of your score. You can use websites like Credit Karma or Credit.com. These sites will display one of your scores from one of the credit bureaus. (Yes, each bureau comes up with its own score.)
Some credit cards now provide you with your FICO score on your statements. You also have the option of paying for a copy of your credit score from myFICO.com.
While it may not be right, many different entities use your credit score number to make a judgment about your entire financial picture. Ultimately, the best way to improve your credit score is to use credit wisely. Take out credit only as you need it, and only relative to what you can pay off. By making full payments on time, you will see your credit score gradually improve.