Credit Scores: Who Needs Em?

Credit scores; it seems like if you have a good one, you love them. On the latter, if you have a bad credit score, you hate them. Credit scores are used for many things; credit worthiness for a credit card, acceptance for a home or auto loan, insurance rates, and now apartment complexes have started to utilize them to determine if a renter is worth the risk. Because that is what a credit score does, it measures the risk of the person.

I cannot blame companies that use credit scores to determine if they will allow someone to borrow money or live somewhere or not. Credit scores measure someone’s financial risk score, and if you are going to have to pay someone or company for a product, they need to know that you are going to pay them back.

Credit scores are built up of 5 main factors.

• Payment History 35%

• Credit Utilization 30%

• Length of Credit History 15%

• Credit Mix 10%

• New Credit / Recent Credit Activity 10%

Now I am going to go through each of these and summarize and explain what each factor is and how you can make it better or worse.

Payment History is rather self-explanatory. It is the history of your payment on your credit, better known as debt. This is the biggest impact to your credit score because it is easily the most important aspect of credit risk. If you make your payments on time and do not miss any payments, your credit score will reflect positively. Conversely, if you miss payments and do not pay on time, your credit score will tank.

Credit Utilization is how much credit you use of your allotted credit. I have always just used my credit card balances to keep track of this. If I have two credit cards and the maximum combined balance is $5,000 and I have a revolving balance of $3,000, then my credit utilization is 60%. The best way to keep your credit utilization score high is keep your credit utilization low. How do you keep your credit utilization low? Pay off your credit cards each month and do not overspend on credit cards. If you cannot keep from spending on credit cards, then do not use them.

Length of Credit History is the average length of time you have had all your credit accounts open. There really is no way to impact this category very quickly. Rather, if you open a new credit account, it will lower your average credit history age. This category is a marathon, not a sprint. Be patient!

Credit Mix is a mixture of all the types of credit you have. This is only 10% of your total score, so please do not think you need to get all the infinity stones of the credit mix to increase your credit score, that would not be a good idea. In my opinion, the less amount of credit you can have open, the better. Because if you have less credit open, more than likely your credit utilization score will increase, your payment history will be strong, and your length of credit history will also be better because there are less accounts able to decrease your score.

New Credit. Simply put, if you are to be opening a bunch of new credit accounts every month, this makes you less appealing to someone wanting to give you money. Look at it like if you were asking a bunch of people for money all the time. After awhile, people would get the jist that you probably are not financially responsible and will not lend you money.

I truly hope this helps you understand how credit scores are composed and how to improve them. Usually the best way to improve your credit score is to not have a lot of credit because there is much less risk of something wrong happening. As the Proverb says “The borrower is a slave to the lender.” 

God Bless

Bubba Miller