MY CREDIT SCORE WENT DOWN BECAUSE OF THIS!

Credit scores are important if you ever want to get a good job, get a loan to buy a house or pay for a car, or get a new credit card. It scores your borrowing power among other things. The credit score oddly ranges from 300 to 850. The higher the score the better. Anything above 720 is considered a great credit score, giving you the best rates on loans and the best credit card offers. There are many factors that affect your credit score, but here are the top 5 most common factors.

1. Payment History

Payment history is the most important factor in your credit score at 35%. One missed payment can have a huge impact on your ability to sign a new lease, refinance a mortgage, buy a new house, or buy a car. Lenders want to be sure that you can and will pay them back on time, every time.

2. Credit Utilization

This score is the second most important factor. It shows whether you are responsible or irresponsible with your borrowing power. If you have 4 credit cards with a limit of $2,000, $10,000, 5,000, and 3,000 respectively, your total borrowing power is $20,000. If you have balances totaling $4,000 across those 4 credit cards, you have a credit utilization of $4,000/$20,000 = 20%. A great credit utilization is under 3% and good is considered under 10%. If you use more than 30% of your credit, it will bring your score down. This is because you are showing creditors that you rely on your credit cards to pay your bills. In a time with credit card points and cash back, many people are purposely spending more than 20% to earn those rewards without realizing it is negatively affecting their scores.

3. Credit History

It is very important to build up your credit as soon as possible. It is not easy getting your first credit card without having a stable income. Start with Chime, Discover, or Bank of America. They offer student and beginner credit cards for those looking to start building up their score. Credit History accounts for 15% of your overall score.

4. Credit Diversity

The more types of credit you have experience with, the better. For example, you can have a mortgage, credit card, home equity line of credit, personal loan, car loan, or student loan. Credit diversity accounts for 10% of your overall score.

5. New Credit

If you are shopping for a car or a house, you probably submitted applications that pulled your credit. With many recent credit pulls, your credit score goes down. Your credit rating goes down because it is assumed that you are about to go into lots of debt.

Why My Score Just Went Down

I did not use my old credit card for more than 2 years so Capital One decided they should cancel it. Cancelling my credit card greatly affected my credit utilization and credit history. My utilization is now higher because my old credit card limit is no longer part of the big picture. My credit history went down because a 10+ year old credit card disappeared from my credit history, bringing the average age of credit down by a few years.

Takeaways

Build up your credit early and don’t apply for too many lines of credit or loans at once. Make sure you only borrow what you can easily pay off “in full” by the next due date. Avoid bankruptcy or foreclosure at all costs because it can as long as a decade to get your credit back up to good levels. Periodically use your credit cards to avoid unexpected credit card cancellations. Use one to pay your cell phone bill automatically, and another for your utilities, and another for your groceries, and so on. Many banks allow you to see your FICO score for free. You can also view your credit score for free through the Credit Karma app or Mint app. I highly recommend using Intuit Mint to help budget and manage your finances. Liked what you read? Consider subscribing for a monthly newsletter.