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3 Jul 2018

Five Factors to Watch If You Want Healthy Credit

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by Shannon Marie

Start practicing good credit management skills, now, and you’ll save yourself frustration and cash for life. Here’s what you need to know.

Now that the confetti and caps have settled, new college graduates face an exciting new phase: entering the ‘real’ world. If that’s you, then your thoughts are likely circling around how to land the perfect job, what to wear in the professional world, and how to stretch your dollars as far as humanly possible.

Something you might not be thinking about (but should be!) is your FICO score. In survey results released last March, FICO researchers found that, of the student loan borrowers polled, those who opted to receive quarterly emails from their lender with free access to view their FICO score were:

In short, if you want good credit, awareness is a very good thing.

So, Why Does Good Credit Matter?

Your FICO score is an indicator of your credit health, and it’s used by creditors and lenders to approve (or reject) your application for a credit card or loan. It also helps determine what terms and interest rates you qualify for—a better score means that you’re a lower risk, so you’ll pay less when you borrow.

Good credit health can also be the deciding factor when it comes to:

Life—and moving out of your parents’ house—is a lot easier when you have good credit.

How Do They Determine Your FICO Score?

So, back to your FICO score. You’ll automatically have a FICO score if you have at least one credit account that has been open for at least six months and there has been activity on the account within the last six months.

FICO generates your score based on information from Equifax, TransUnion and Experian credit reports or, in other words, your credit activity. Don’t be surprised if your scores from these credit reporting agencies don’t match. Rob Kaufman, at FICO, explains, “Due to the fact that the agencies may receive different creditor information at different times (or not at all), you might not have the same FICO Scores at each agency.”

To calculate your score, FICO looks at five, weighted factors:

1. Payment History (35%)

Your payment history—including on-time payments, late payments, bankruptcies and related items—is the biggest factor that affects your FICO score with a 35 percent weighting in the calculation. As Ethan Dornhelm, VP, FICO Scores and Predictive Analytics writes, “The FICO score rewards on-time payment behavior, and dings those who have frequent missed payments.”

2. Amount Owed (30%)

Coming in second, with a 30 percent weighting in your FICO score calculation, is the amount of debt you have and how it’s distributed. For a better score, keep your revolving balances low, and pay down any installment debt. In addition to how much you owe on each of your accounts, FICO also looks at how much of your available credit you’re using.

3. Age of Credit History (15%)

Next up is the age of your credit (not to be confused with your Age of Money). This one’s worth 15 percent of your score. The longer your credit history is, the more it helps your score. You can still have a good FICO score with a short history if you score well on the four other factors.

4. New Credit & Inquiries (10%)

10 percent of your score is based on whether or not you’ve recently opened or applied for new credit accounts. Ethan writes, “FICO research has found that opening several credit accounts in a short period of time represents greater risk of future missed payments—especially for people who don’t have a long credit history.”

5. Mix of Accounts Types (10%)

And the last 10 percent of your FICO score is influenced by what kind—and how many types—of credit you have. Types of credit include mortgages, installment loans, retail accounts, credit cards and finance company accounts. Keep in mind that if you don’t have a lot of credit activity or history, your mix of accounts will more heavily affect your score.

How to Check (And Raise!) Your FICO Score

It’s never too late to clean up your credit, but the earlier you start, the more you’ll reap the benefits! Do your best to pay your bills on time, pay off your debt and only apply for new credit if you really need it—and, really, do you?

You can get a free, annual credit report at annualcreditreport.com. To access your FICO score, you can visit myfico.com or, to view your FICO score for free, find out if your bank, lender or credit card company is part of the Open Access Program.

It’s also worth knowing that, if you’re denied credit (or approved, but with a higher than usual interest rate), the lender is required to provide you with your free score.

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