Meaning of Credit Score
How do you get a credit score? The piechart breaks down the scoring areas, but I like to picture it a little differently.
Credit bureaus want to see that you’re responsible when you have access to lots of money. So even if you are REALLY responsible, but have one credit card with a small limit, your score won’t be at its full potential. You need to have access to lots of money (3-5 cards are recommended, avoid department store cards), then prove you are not a risk!
As I mentioned in Part One, I use Credit Karma to check my score.
We’ll talk about Payment History and Utilization Rate in part three of this series, but for now let’s talk about the other elements that affect your credit score.
Length of Credit History Matters
If you’re young, this is tough because your credit accounts are young too. However, that’s not the only way to keep your score going up. Your credit report looks for the longest account you have had open AND the average age of all your accounts combined.
My oldest account was a card I got when I turned 18. When I got married, I switched to my husband’s bank and credit card. But I didn’t know that I could still keep that original credit card open, even if I closed my old checking account. I didn’t want to keep track of it, so I closed it. Meanwhile, the average age of my credit accounts dropped . . . and so did my credit score.
Last year, I almost made the same mistake when we opened a new card. We were just about to close our old card when I discovered the average age of your credit factors into your score. I thought it was just a line companies came up with to keep you as a customer! Keep your oldest card open.
So what’s the main lesson about the length of your history? Continue to let those credit roots grow deep. Show the Credit Bureaus you can stay planted. The only reason you should cancel a credit card you don’t need is if it charges an annual membership fee or the card is just too much of a temptation.
Credit Inquiries Affect Your Score
When you apply for a new line of credit, they check your credit, or take a “hard pull” of your information, which can negatively affect your score. These go on your credit report, so don’t have too many too close together. However, they leave your record quickly (12 months) and may subtract only a couple of points. This article from Equifax has a complete listing of how long things stay on your credit report.
When we applied for new credit cards, they did a “hard pull” on our credit, dropping us a few points. But by the time we need a loan, this will be off our credit reports and won’t matter! The good (travel rewards, higher credit limit) outweighed the bad.
Not everything has the potential to hurt your score, so don’t worry. When you apply for a car loan, you have a seven-day window to shop around for a rate. Any checks in that time will be seen as one hard pull. You have fourteen days for a home mortgage.
Some credit checks, called “soft pulls”, don’t go on your report. These happen when you check your own credit or when you get pre-approved offers by mail.
For the complete break-down of your score you can check out myFICO.
When you learn what your credit score measures, you can avoid behaviors that hurt it. Learn practical steps you need to take in part three of this series.
Check out the rest of this series: