Notes on Parenting

Insights for parenting babies, toddlers, teens, and young adults.

Monday, November 1, 2010

What's In a Number? Understanding Your Credit Score



What's your credit score? If you don't know, you should find out! It's one of the most important numbers you will ever have in your life! The first time I looked mine up a few years ago, I was surprised to find that it wasn't very awesome. As I always pay my credit card charges off on time every month, I was somewhat surprised that it was only moderate. But then I learned what goes into a credit score, and it made a little more sense.


Here is approximately how a credit score is determined (based on FICO's method):

  • 35% -- Your payment history: Do you pay your bills on time?
  • 30% -- Total amount owed as a percent of limit: You want to stay as far away from your credit limit as possible. Keep your balance low and request credit limit increases.
  • 15% -- Credit history: How long have you had your oldest account? (Hint: always keep your oldest credit account open, even if you don't use it)
  • 10% -- Application history: Every time you apply for a new credit card (or any other type of credit, for that matter), this part of your score hurts.
  • 10% -- Credit Mix: Do you spread your credit over different types of accounts (i.e. Credit cards, mortgage, line of credit, car loan).
In my case, I was a student without any loans, so my credit mix didn't really exist - all I had were credit cards. Also, since I had very little income, I didn't have a very high credit limit on my cards, so I almost always came really close to my limit each month, which was really hurting my credit score.

Now don't use the Credit Mix ingredient as an excuse to go take out consumer loans to buy a new car and furniture. It's only 10% of the score, so in the grand scheme of things, you're probably better off avoiding them if you can. The savings you might get with a better mortgage rate is likely much less than the interest you would be paying on high-interest consumer loans.

Here are a few tips to improve your credit score:
  1. Get a credit report annually. Go to annualcreditreport.com to get a free report from each of the three major agencies. Look for any oddities that might indicate identity theft or mistakes - these will hurt your credit score and possibly prevent you from obtaining credit when you need it. You can also pay a small fee at myfico.com to get your credit report and your FICO score (the most commonly-used score).
  2. Always pay your bills on time! This is the most important factor determining your score! I recommend setting your cards to Auto Pay so you don't have to worry about forgetting. Of course, you should always be mindful of how much you are charging throughout the month so your payment doesn't overdraft your bank account.
  3. Request an increase in your credit line. 30% of your score is based on how far from your limit you spend. And it's free to ask.
  4. Reduce credit card spending. The other way to stay far from your limit is obviously to spend less!
  5. Keep your oldest credit card open. Even if you don't use it.
  6. Protect your social security number. Protect your SSN from identity theft, but also avoid applying for new cards all the time, even if the store offers a special promotion for applying. Each application hurts your credit score. It's probably not worth it.
  7. Get a credit report ANNUALLY!

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I'm Jenny Willardson from A Young Mom's Guide to Motherhood, Money, & Marriage, and I'm excited to be a guest author on Notes on Parenting! Look for me every 1st and 3rd Mondays of each month for more advice on family finances.




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