Understanding your Credit Scores

Your credit score is like a glimpse into your financial potential. It examines your current and past status with credit and loans and extrapolates your ability to take on more debt or loans. Your credit scores are becoming more and more important and are being examined by many people considering you for various situations. It’s important to know how to create and maintain a good credit score for your financial future.

What creates your credit score?

There are 5 things that go into creating your credit scores. We’ll go into each of these factors below:

  1. Payment History - This one is a fairly obvious category. It looks at your payment history of all your various credit activities. Missed or late payments will create red flags and reduce your credit score. Your Payment History subscore will usually account for 35% of your credit score. 
  2. Current Debt - How much money do you currently owe people? Unsurprisingly the more you owe, the more your credit score may be poorly influenced. Debt will account for 30% of your credit score. It’s important to note that having a large amount of debt may not be detrimental to your credit score.
  3. Historical Reliance - The longer you’ve had your credit types, generally the more reliable you are. This shows that even if things do go wrong in the past, you’ve managed to recover. This doesn’t mean that a brief period of time can’t have a good credit rating. It’s merely one factor that can add to your credit rating. For this reason it’s often a good thing for university students to generally get their first credit card (If they didn’t have one before) so they can start building their credit rating.
  4. Recent Inquiries - Credit scores will take into account when you are having repeated requests to see your credit scores/history. Generally this happens if you are trying to get the best possible credit value for a large purchase like a house or car. It’s damaging when you’ve had recent troubles as it indicates that potentially you are in financial trouble and hunting for the absolute best rate to try to deal with other credit problems.
  5. Types of Credit - There are different types of loans. Revolving credit is items like credit cards. You’re using the credit, and then paying off the credit. The second type is considered installment credit. These are items that you have taken credit out on for, and are not paying back on a specific installment basis. This often refers to student loans or mortgages. Having various credit types actually helps improve your credit score as it shows a diversity in your financial payment.

Who Creates Your Credit Score?

In the United States, your credit score is based on the FICO model. There are credit bureaus that compile and monitor your credit score. The main ones are TrainsUnion, Equifax and Experian. It’s important that you are aware of your credit score and you can request copies of your report yearly. It’s important to ensure that your credit score does not have any mistakes. The main credit bureaus have been known to make mistakes mixing up people with other people of the same or similar names. This can sometimes damage your credit report with situations or debt that you never accumulated.