While working as a relationship manager at a bank, I saw some weird things people tried do to build credit. It wasn’t really their fault since no one really explained to them how credit worked. One time, I had a customer who let his checking account experience overdraft fees on purpose to show the bank he could repay the fees to show consistent repayments to debt hoping to build credit.
If you somehow landed on this page, you are probably starting to learn about credit and what goes into a credit score. It is something that wasn’t taught to me when I was in school but somehow played such a huge role in my life. It determined the types of cars I can drive, the interest rates on my loans for graduate school, and whether I was able to help my parents by refinancing our mortgage when they needed financial help.
If you want to learn about the resources I used to help monitor and track my credit journey, you can read one of my other posts on how I raised my credit score by 200 points. That task definitely took a while but was a process that helped me understand credit so much more. As you raise your score, you will learn the factors that go into your score as well. Just trust the process and own up to your score, and remember that your score is not a reflection of who you are. Its just a reflection of specific choices that were made regarding money. Once you learn these factors, the process will become much easier.
I am going to pull information from a few sources that I will link to so you can continue learning about credit as well. Just know that credit and building my credit was something that took time and lots of patience. It is something that can drop really fast but very slow to grow and rise. Be patient, trust the process, and do your part to learn about the factors that go into your score. So grab your latte and follow along with me.
Payment History – 35%
The one thing you never want to do is miss a payment. At least pay the minimum to avoid any missed payments. Your consistent payments with your debt makes up roughly 35% of your credit score. Try and find a way to automate your payments, Set reminders on your phone, enter calendar reminders on your calendar or something. Find a way to keep track of when all your payments are due. You can probably get by without a method of plan when you only have one credit card payment to worry about. But as you grow and have more responsibilities, the number of account you make payments for may increase. In the beginning, I only had one monthly school loan payment to worry about. Fast forward to now and I have a mortgage, car payment, credit card payment, and a few bills to pay each month. So find a system that works for you now and your life will be so much easier. Keep in mind that all missed payments are created equal. You minimum payment can be $25 or $500. It doesn’t matter how little your payment is. Any missed payment, regardless of the amount, has the same negative impact on your score. When I was younger, I told myself missing one $25 payment was not a big deal. But thye actual hurt my score the most. So do yourself a favor and don’t miss any payments. Regardless of the amount.
Amount of Money Owed – 30%
This second category is where most people get credit cards twisted so pay attention. You are not supposed to use your entire credit card balance or carry a balance into the next month. Did you catch that? One more time, you need to pay off your entire balance each month. Do not carry a balance over into the next month for a few reasons. For starters, paying your balances in full eliminates the interest you would have to pay in addition to the debt. If you pay off your credit card balance each month, then you never pay interest. So the interest rate would never matter.
If for any reason you cannot pay back the full amount, try and keep the balances you owe less than 10% of your overall available credit. Let me repeat that, if you owe more than 10% of your overall balance, your credit will starting dropping each month because it shows creditors that you can not pay back your owed amount. For example, lets say you have 2 credit cards with a $500 available balance each. That means your overall credit available is $1000. If you carry a balance of $100 into the next month and decide not to pay it off, your score will start dropping. Remember, the key is to keep that balance that carries over less than 10% of all your available credit. The total credit is what’s important, how many cards you have.
These two factors make up roughly 65 to 70 percent of your credit score. The percentages may change as more factors are included or updated in the future. Just know that if you pay off your balances in full or try and keep your balances each month less than 10% and never miss a payment, your already doing the two most important things to fix or raising your credit.
Credit History – 15%
Now that you understand the two big factors to make the most impact on your credit score. Let’s talk about the remaining 3 things that add the icing on the cake (or milk to your latte) to finesse and add the little things that raise your score above the 700.
Your credit history is something that banks pay attention to. What most popular number I have found is 7 years. That is seven years of credit history is what they want to see on a person’s credit history. Every time you add a new account, they average how your credit history with the newly added debt account. So if you only had one credit card for 7 years and nothing else, then your credit history is 7 years. If you end up applying for a car loan or another credit card, you will now have 2 credit accounts with an average credit history of 3.5 years. Make sense?
So try and keep your oldest credit accounts open for as long as you can. Don’t close your credit card accounts, especially if they were one of the first credit accounts you opened. Try to use them once a month for a monthly subscription like Netflix or your internet bill and set up an automatic payment each month. My mom used to call the credit card companies after she paid off a card with a large balance to close the account. The logic made sense at the time. Have the card is what caused her to use credit cards leading to the large balance. So if she didn’t have a credit card anymore, then she wouldn’t get into credit card debt again. So she would call and cancel the account. She ended up losing all that credit history that she built along with all those on-time payments she made.
Types of Credit – 10%
The remaining 20% that goes into your credit score are the things you want to pay attention to using some type of credit monitoring app. Personally, I have used Credit Karma for the longest. It really is a free app and provides suggestions along the way. The fourth factor is the type of credit accounts you have on your account. For example, I have revolving credit accounts and installment accounts:
- Revolving credit account: credit card or other balances that you can reuse once you make payments towards your debt.
- Installment credit accounts: car payments, mortgages, or school loans. These are types of credit accounts that eventually get paid off entirely and then stay on your credit report.
Creditors like to see you balance both types of credit accounts to see how responsible you can be with paying back your debts, especially if you are planning on purchasing a home at some point in your life. The average number of credit lines banks look for in a conventional home loan is around three accounts. So if buying a home is where in your trajectory, starting your credit accounts sooner is probably better. Times might change ten years from now or you may end up buying a house outright with cash, but until one of those two things happens, follow what I have outlined as a guide and keep dining your own research.
Credit Inquiries – 10%
The last thing is how many times credit companies check your score. If you ever apply for a credit card, an apartment in some instances, or a car loan, companies “run” your credit score. Anytime they run your score, it shows on your credit report. There are different reasons why that is the case and you can read up on that by doing a quick google search. But as a rule of thumb, don’t apply for things unless you really need them. Otherwise, you run the risk of getting your credit checked unnecessarily while hurting your credit score.
Range of Credit Scores (include the credit bureaus)
Credit scores typically go from 300 to 850. There are three main credit bureaus that monitor a person’s credit history and report. If you are curious what those companies are, here you go:
Conclusion
Now that you know the rules of the game until they are updated lol, and what actions to take in order to raise your score. Just know that each person’s financial journey is different. You can’t really compare your situation to someone else’s. Each one of us wants to run to the finish line of finance. Just know that each person’s starting line is different. Some of us are starting miles behind while others may not have as many setbacks. Regardless, take responsibility for where you are and focus on the things that you can control. You got this!! We will talk about the finish line and what that looks like in another post. Just know that each person’s goal can also be different too. Hope this post helps and I’ll catch you all later. It’s time for me to grab my morning coffee now. Bye for now!!
Additional Resources