Credit Scores

In the simplest of terms, a credit score is a number between 300 and 850 that represents the likelihood of someone paying back debt they owe. These scores are determined based on a multitude of factors, such as payment history and length of credit. Your credit score can impact not only whether a financial institution will lend money to you but also what your interest rate is.

There are five parts that make up your FICO credit score.

- Payment History (35%)
The biggest factor impacting your FICO credit score, making up 35% of your score, is your payment history. One of the first things lenders look at is if you have paid past accounts on time, because it is a good indicator on whether you will pay a new account on time. It is important to note that one late payment can stay on, and impact, your credit history for years.

- Credit Utilization (30%)
Credit utilization is the amount of revolving credit you are using compared to the total amount of credit you have available to use. Having open accounts and owing money on them does not make you an immediate high-risk borrower, however using a lot of your available credit, or having them fully maxed out, can indicate to lenders that you are overextended and at a higher risk of default. A good general rule of thumb is to not use more than 30% of your available credit at any given time. For example, if you have a credit card with a limit of $1,000, try not to use more than $300.

- Length of Credit (15%)
Length of credit refers to the length and age of the accounts that appear on a credit report. The longer the tradelines have been established, typically the better the credit score will be. It takes roughly seven years for a tradeline to fall off your credit report.

To help increase the length of your credit history, it is a good idea to open a revolving line of credit, like a credit card, and keep it open for the entirety of your credit life span, even if you do not use it very often. It may become tempting to close out accounts, especially credit cards that you do not use, however closing them may negatively impact your credit score. This is not to say you should never close out a long-standing line of credit. For instance, if you have a credit card that you do not use that charges a yearly fee, it may be worth closing it out to save you money, or if you are going through a debt consolidation it may be required.

- Credit Mix (10%)
When it comes to types of credit, there are three kinds, revolving credit, installment credit, and open credit.

Revolving credit is a line of credit where the funds can be used for anything at any time up to a certain amount, known as a credit limit. An example of a revolving line of credit is a credit card.

Installment loans are loans that have a fixed rate, a reoccurring monthly payment and once paid in full, are closed out. A few examples of installment loans include auto loans, signature (personal) loans, student loans, and mortgages.

Open credit is a fairly rare type of credit that most people will probably never see appear on their credit reports. Open credit is an account that you can borrow from up to a certain point, but the entirety of the amount borrowed must be paid in full each month.

It is good to have a good mix of different types of credit on your credit report, but do not fret if you only have one single type. You can still have a good credit score with only one type of credit reporting. Credit mix, making up 10% of your credit score, is not the most important factor, but having a good mix of credit helps show lenders that you are able to manage different types of credit and make payments on time to each.

- New Credit (10%)
New credit is a double-edged sword. To begin building credit, or to get a healthy mix of credit, you must open new accounts. However, opening too many accounts too quickly can also be harmful to your credit score. It may make lenders see you as a risk. Opening new credit lowers the average age of all of your accounts. The inquiries, which are the number of times a person has their credit pulled, and are needed to apply for a loan, can also dock your credit score by a few points. It is ideal to have no more than two to three inquiries a year on a report.

The three major credit bureaus are Experian, Equifax, and TransUnion. These three credit bureaus collect information on peoples' credit use. If you have ever had any sort of loan or credit card, there is a high chance you have a credit record with at least one of the credit bureaus.

The information collected by these credit bureaus is used in a variety of ways, but some of the most common are:
- to calculate credit scores
- help make lending decisions, and
- pre-employment background checks.

You are allowed to view your credit report at any time as well as dispute items on your credit report that are inaccurate. If you ever notice any fraud on your credit report, or wish to prevent fraud in the first place, you can contact these credit bureaus to freeze your credit. Freezing your credit will prevent lenders from being able to access your report. In order to have your credit pulled and apply for a loan, you will have to reach back out to the credit bureaus to unfreeze your credit.

Building your credit takes time and patience, and it can be a bit tricky to get started. It can be challenging to get a loan without credit history, but there are many options out there designed to help people build their credit.

Credit Cards
Credit cards are a great way to build and establish credit. A secured credit cards is a revolving line that is secured by cash. Since they are secured by funds, they are a lower risk to lenders and allow a borrower to have the same use as a regular unsecured credit card.

Another way that you can use a credit card to build your credit is if someone adds you as an authorized user on their credit card. Becoming an authorized user will add the card's payment history onto your credit. When trying to build credit, this can be helpful.

Credit Builder Loans
A credit builder loan is designed to do exactly what the name says, build credit. This type of loan is meant for people who have no credit history, or little history; normally less than 6 months old and in good payment standing. Typically, the money you borrow from this loan is held in an account until the loan is repaid. It is similar to putting funds in a savings account that you can not touch until a certain maturity date.

Self-Report Bills
You can self-report certain bills that you already pay that would not normally show up on a credit report. In some instances, you will have the ability to report your rent payment or utility bills. It is important to know that these self-reported payments may not be taken into account when calculating your credit score, but it could still help you establish a credit history.

Remember the Factors that Make Up a Credit Score
- Pay at least the minimum payment every month on time.
- Keep your credit card utilization to 30% or less.
- Keep revolving lines, like credit cards, open to get a good length of credit history.