As a fellow millennial, I am all too familiar with the current debt that plagues our generation. We all go to college and amass a whopping $29,000 in student loan debt, this is the national average reported by Equifax. In my experience I know quite a few people with much more than that in JUST student loans. With that being said, more and more people are unable to pay these debts off and this is effecting their credit, whether you know it or not.
So, today we’ll discuss how your credit works, and hopefully by being in the know, you will be able to take steps towards that 750-800 credit score. Remember, it’s not about where you are, all that matters is where you are going. And that high credit score is where we are headed.
Before we jump into how a credit score is composed and what matters the most, let’s quickly talk about why your credit is important? Well firstly, your credit score determines how credible you are with money. This is how your future lenders are looking at you, even though there may have been certain circumstances that caused late payments in the past, the financial companies won’t know that. This will tell them if they should lend you money, i.e credit card, mortgage, etc. and how high or low your interest rates should be. Secondly, having a good credit score allows you to have that one credit card for emergencies. Think about it this way, if your car breaks down and it needs $500 worth of work done to it, how are you going to pay that if you don’t have a credit card? Well, you’re gonna need cash of course! So all in all, if you’re not a saver just yet, you’ll probably need credit to hold you up until you’re strong enough to be independent of credit cards, and other debts. Hence, our credit score should be somewhat on par.
What is my credit compromised of?
- 35% is Payment History. Paying your bills on time. Your score will decrease if your lender consistently reports that you’re late with payments. This is the most important aspect of your credit as it is essentially a grade on the likelihood of you paying back the funds you have borrowed. You will be graded well in this category if you pay your bills by or before the due date.
- 30% is Balances vs. Lines of Credit. Your score will improve if you can keep each line of credit paid down. A good rule of thumb is to keep balances at 20 percent below the credit limit. This category is ranked almost as high as your payment history, because it shows that you don’t spend beyond your means and are not “maxed out”. It may be time to review your budget if you usually carry high balances.
- 15% is Length of Credit History. In other words, do not cancel credit cards that you don’t use that often. Keep the account open and make small purchases, once or twice a quarter just to keep it active. The longer your accounts are open and in good standing, the more points you will get on your credit score. It also proves that you can be in a “long term relationship” with a line of credit.
- 10% is Different Types of Credit. It’s good to have a few different types of credit open, from credit cards to mortgage loans. Proving that companies trust you now will help more and different companies to trust you in the future.
- 10% is New Credit. Opening several accounts in a short period of time, could be deemed a high risk, especially if you don’t have an established credit history. A good practice would be to wait a few months between applying for new cards and loans. Opening up new lines of credit also means more inquiries to your score, which can be damaging (inquiries made by you on your own credit scores do not count here, so no need to worry). This isn’t a huge factor in your score, however every point into your score matters.
With this new knowledge, you are ready to go out and increase your credit score! Don’t forget that knowledge is power ONLY if you APPLY it. So use this to your benefit! Also, head to https://www.annualcreditreport.com to get a FREE copy of your credit report, this way you know where you are and can make head way towards excellent credit! Talk to you soon!