An In-Depth Look at the Credit Score

The ever elusive credit score. Where does it come from? Who gives you a score? How do they calculate it? The best way to manage your credit score is to know exactly what goes into it. I've answered these important questions so you can make informed decisions about your credit.

Who Reports Your Credit Score?

There are three major credit reporting bureaus in the United States: Experian, Equifax and TransUnion. Each one is responsible for analyzing your credit report and issuing you a credit score between 300 and 850. The higher your score, the more likely someone is to loan you money or issue you a credit card. Not every merchant reports to every bureau, and each bureau has different algorithms so that's why your credit score is never the same amongst all three. Credit scores normally fall into these four categories:

  • 300 - 629 Poor Credit
  • 630 - 689 Average Credit
  • 690 - 749 Good Credit
  • 750 - 850 Excellent Credit 

How is Your Credit Score Calculated?

Your credit score is calculated based on five different factors. Payment history makes up 35% of your score and is hands down the most important part of any credit score. Credit utilization, or how much credit you're using vs how much is available, makes up 30% of your score. Low credit utilization shows your ability to manage credits. Types of credit, such as credit cards, student loans, mortgages and auto loans, is responsible for 15% of your credit score. Your ability to manage multiple types of credit reflects well with creditors. Length of credit accounts makes up 10% of your score. The longer you can keep your lines of credit open the better. Last but not least, new credit accounts for the last 10%. This takes into account all of your recent requests for new credits.

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How Opening/Closing Credit Cards Affects Your Score?

When applying for a new credit card or deciding to cancel an old one, it's important to know how that affects your credit score. When applying for a new credit card it tends to lower your score slightly because of the hard pull on your credit. If you apply for too many, too quickly, creditors may believe your taking on too much debt. Luckily new accounts only make up for 10% of your score. If you decide at some point you want to close a credit card this can affect your credit utilization. If you lower the amount available to you, you automatically increase your utilization. While this does account for 30% of your score it doesn't necessarily mean your going to ruin your credit score.

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How Do I Handle Credit?

I'll be the first to tell you I'm not the least bit concerned about my credit score. I apply for a lot of credit cards, but I know that's only a small piece of the big picture. My credit score is roughly 715, depending on which credit reporting bureau you look at. My number one objective is to pay my bill in full every month. Payment history is the largest reporting factor, so I make sure it's always taken care of.

Paying your bill in full each month not only saves you from paying interest, but it also keeps your credit utilization low. I don't get too hung up on the types of credit I have, because it's a small chunk of my score. I don't see the point in getting a car loan just for the sake of improving my credit score. I keep the length of my accounts high by looking for long term credit cards. Do I cancel some after the sign up bonus? Sure, but I also sign up for ones I know I'll keep for a long time.

Last but not least, I apply for a good deal when I see one. I know my score will dip, but with all other things considered, it won't be for long. The only time I'd discourage anyone from opening a credit card is if you're planning on buying a home soon. Getting a mortgage can be a tricky process, so I always suggest laying low credit wise until that is complete.

All-In-All

The key to managing your credit is to be informed. There are a lot of myths about credit scores, but if you know the facts and manage your credit wisely you'll always have a good one.