Good credit: it’s difficult to get, and even more difficult to understand. You’ll have an easier time building credit if you know the building blocks of a good credit score. Turns out it’s a bit more complicated than saving money and staying debt free.
Your credit score (also called a FICO score) is a 3-digit number based on a formula issued by the Fair Isaac Corporation (FICO). This formula uses 5 different factors to determine your overall credit worthiness. You don’t need to have each factor memorized, but you do need to make your payments on time, maintain accounts that build credit, and avoid a few common pitfalls. Here’s the breakdown:
1. Payment history – 35%
Making regular payments on your credit cards, student loans and other debts will boost your credit score. Any missed payment will lower it. Recent history counts more, so if you’re making a good effort to repay your debts now, fear not: credit bureaus will take notice.
2. Amounts you owe – 30%
Long story short, don’t max out your credit cards. Credit bureaus look at the difference between your spending limits and the total amount of debt you have, so if you carry a balance regularly, this will lower your score. However, this doesn’t necessarily apply to installment loans (like student loans), which can actually improve your score if you keep up with the payments. Continue reading