What’s in a Credit Score?
January 30, 2017
We know a lot of things compete for college students’ attention. Finishing assignments, passing exams, seeing friends, looking for jobs or internships… the list goes on and on. While these are all important things to focus on, learning about credit is crucial for your future success, as well.
Many potential lenders, employers and landlords will check your credit to decide if you’re a qualified borrower, employee or tenant. If you don’t know much about it, you may just cross your fingers and hope for the best when someone asks to check your credit. However, with so many important things riding on it, it’s much better to get informed now.
One commonly used item to determine someone’s creditworthiness is their credit score. A credit score is a three-digit number that allows inquirers to quickly compare you against others. There are many different scoring models, so what a “good” score is can vary between each one. In general, a higher score reflects better credit. The five components of a credit score are listed below.
- Payment History (35%) – Paying bills on time is the best way to build and maintain good credit. More than a third of your credit score is based on this simple habit.
- Amount Owed (30%) – How much you owe accounts for almost a third of your credit score. Even if you always pay your bills on time, high balances or large amounts of debt can hurt your score. Think carefully before overusing credit cards or borrowing extra student loan money.
- Length of Credit History (15%) – This is a reflection of how long you’ve had established credit and the average ages of your accounts. The “length of credit history” factor is one of the reasons some students open credit cards in college – to establish credit at a young age. But before taking this step, take a realistic look at yourself and your financial situation. If you can’t handle the responsibility of paying it off in full each month and on time, it may not be worth it. Missed payments and high balances can seriously hurt your credit. Plus, paying interest on purchases that you can’t pay off in full is an expensive habit.
- Credit Mix (10%) – There’s a difference between revolving credit and installment loans. Revolving credit is credit that is available to you on an ongoing basis. When you spend a portion of it, it becomes unavailable until you pay it back. Once it’s paid back, it’s available again. A good example of this is a credit card. Installment loans are debts that are paid off in set monthly payments. The money doesn’t become available again after you’ve spent it. The most common examples of these are student loans or car loans. Installment loans are typically seen in a more positive light than revolving credit. The types of credit that you use impact this portion of your score.
- New Credit (10%) – You should avoid opening multiple accounts over a short time period. Each new account impacts your credit score. The exact impact may depend on the type, dollar amount, and number of new accounts, but overall, borrowers that have opened several new accounts in a short period of time are seen as riskier to lenders.
The most important thing to remember is that what you do now will impact your credit score both now and in the future. Based on your financial choices, it will become easier or harder for you to reach your future goals, so take the time to get informed and choose wisely.
Find more money management tips and resources on our WalletWorks page.