There are few numbers that impact your life as much as your credit score. It can determine where you live, what you drive, if you can borrow money and what interest rates you pay.
Most companies look at a person’s FICO® Score when checking credit. This score can range from exceptional (800-850) and very good (740-799) to good (670-739), fair (580-669) and very poor (300-579).
“If your credit score is poor, your ability to get approval for basic loans will be more difficult,” said Kurt Brucker, credit score expert for oXYGen Financial, a leading independent financial services firm.
Brucker, who provides personal finance and career guidance to millennials on the national podcast “They Don’t Teach You This,” explained that five factors go into calculating a good — or bad — credit score.
Late payments are one of the fastest ways to damage your credit. According to Brucker, payment history has the greatest impact on your score — weighing in at 35 percent of the calculation.
If you want to avoid a poor rating, your first step is to make sure payments are made on time each month.
“Utilization is the amount you carry on your credit card relative to the limit set,” said Brucker. “A good rule of thumb is that you never want your balance to be over 30 percent of the limit you were given.”
For example, if you have a charge card with a $7,500 credit limit, don’t put more than $2,250 on the card at a time.
The lower the percentage of available credit you are using, the better, he explained, as utilization accounts for 30 percent of your credit score.
About 15 percent of your score is calculated based on how long your account has been opened. Credit agencies look at both the average age of all your accounts, as well as the age of your oldest account, to determine how much experience you have in managing credit.
“Bad credit means you have a history of major blemishes and makes lenders more reluctant to extend credit to you because you have a bad track record,” Brucker said. “No credit means there is a question mark, and you are seen as a risk because there is no track record to rely on.”
Your credit score is also impacted by the number of inquiries on your account. This accounts for 10 percent of your score.
“Recent activity looks at what you have applied for in the last three to six months, any new inquiries or if you are paying off accounts,” he said.
If you are trying to improve your credit score, focus on paying off your existing accounts for a while, instead of taking on new debt.
The final piece looked at for your credit score is your overall capacity, which is the total outstanding debt you are currently making payments on. This reflects to lenders if you have enough flexible income to cover your monthly bill.
Taken together, these five pieces give potential lenders an overall picture of your credit.
If you’re unsure of what your credit looks like, request a free copy of your credit report at AnnualCreditReport.com and look at what factors are negatively impacting your score.
“A good place to start is to pay off any collections debt first, and then make sure you’re paying off monthly balances and not getting near your limit. This will ensure you will be well on your way to a higher score,” Brucker said.