Credit Scores to Score Cards

Here is the answer to the question that you’ve probably all been looking for. What about my credit?

Essentially a credit score is comprised of a few different histories. Thanks to MyFICO.com for the graphic below. It shows how your credit score is formed.

You can see that your score is comprised of many factors.

Payment History: This is you paying your bills on time. Your bills include things like credit cards, mortgages, and loans. All of these contribute toward making your score higher. Unfortunately the gas bill and the city bill you receive don’t contribute toward this even if you make the payment on time. However, if you don’t pay that city bill it can negatively affect your score, so it doesn’t help you much, but it can definitely hurt you.
Amounts Owed: The amounts owed category has to do with having high balances on your cards and lots of payments on a monthly basis. Make sure that you aren’t getting even to 50% of your available credit limit on your cards. Some sites tell you that you can get closer, but just don’t live on the edge. For example, if your credit limit is $1000, you shouldn’t spend more than $500 on the card in one billing cycle. That can hurt you. Keep the balances low and ideally you would pay them off each month. After all, it doesn’t do you much good to pay interest if you are trying to get free travel…
Length of Credit History: What is the average age of your credit account? This is affected by how long you have had your average account open. If you are new to the credit industry you won’t have anything here. This takes into account your mortgages, loans, credit cards, etc.
New Credit: This takes into account the number of recent inquiries on your credit and the distance between each of those inquiries. It also looks at how much new credit you have vs. what experienced credit you have.
Types of Credit Used: This looks at the different types of credit you have established. There are mortgages, installment loans (e.g. car loans), credit cards, retail accounts, etc.

Our Take:

Look, you need to be smart. Hopefully you have already begun building your credit and are well on your way to carefully managing it as you hit all of these bonuses and travel for free. Make sure you always keep you oldest credit card open as it has a great history of payments (hopefully). Try to open a few different types of accounts so you can build your credit not only by credit card, but also buy other types of credit.

Make sure you don’t have too many inquiries, but really you can have quite a few and it won’t affect you that much. I’ve heard that you can have up to 9 inquiries with each of the thee crediting agencies every 2 years. That could theoretically be 27 inquiries every 2 years. Make sure you pay your bills on time and don’t run high balances.

To help you effectively manage your credit, you can use the services of Credit Sesame. We don’t have their direct link yet, but here is their website. It is a personal finance & debit tool. We should have the link within the week.