Everything I Know About: Credit Scores

Helpful graphic provided by my friend David Coven, founder of Scholarship Junkies. Check out his TED Talk here an his episode of the Moth here.

Over the past few years, personal finance has become a passion of mine and I want to pass on everything I know. There’s a surplus of information a Google search away but here’s a streamlined understanding that has helped me as well as friends and family.

Key Takeaways:

Utilization:

• Stay below 30% by the time your payment is due
• Work to use your credit card like a debit card and pay everything off, every time

Payment History:

• Take advantage of automatic payments

Derogatory Marks:

• Result of defaulting on loans, getting cited for collections, not paying bills and having someone repossess your debt

Credit History:

• Basically, the longer you have your credit vehicles, the better
  → Loans, mortgage, credit cards
• The more you open when starting out, the better
  → Over time, you’ll have a stronger basis for opening new lines of credit
  → Lowers credit score at first due to age of credit

Total Accounts:

• Tricky because our inclination is to pay off all debt
• Designed to show that you can manage having lots of different accounts
• Many accounts with little spending shows that you’re trustworthy
• Student loans / debts count as accounts

Credit Inquiries:

• Basically based on how many credit cards you apply for in a limited time span
• Less important than building credit history
• After 1 year, the inquiries stop affecting your score
• After 2 years, they drop off of your report entirely

Important to remember:

• Your credit card is NOT in addition to your cash / debit. Only use what you can pay back
• Work the system — use time to your advantage. If you are not in a situation in which you will soon be applying for a loan, consider opening more credit cards! Time will be on your side for credit history and, when you need it, you’ll have high credit availability which you can use to keep your credit utilization low.
• Look out for perks that align with your values– think about which ones you want to prioritize: cash back, travel, rewards, etc.

Things to watch out for:

• High interest rates
• Some credit card companies have rules for how many cards you can apply to in a certain time period (ex. 5/24 rule for Chase)
• Annual fees