Financial Literacy Month – Tip #16

A credit score is like a financial GPA. Credit scores tell lenders how credit has been managed in the past. A higher score suggests less risk, a lower score suggests more risk. Knowing the factors that influence a score can help you maintain or even increase scores. Here is a quick breakdown of each factor:

Payment History – 35% of a FICO score is based on payment history with all accounts (e.g., loans, credit cards, student loans, etc.). On-time payments increase the score, late payments decrease the score. 

Type of Credit – 10% of a score is based on having a variety of accounts such as credit cards, auto loans, mortgage loans and retail accounts. 

Debt – 30% of a score is based on how much you owe on each account. Keeping the ratio of debt to available credit low will increase the credit score. For example, if a credit card has a $10,000 limit, keep the balance at or below $3,000 (or 30%). If balances are near the limit, a lender may view this as high risk and the credit score will decrease. 

New Credit – 10% of the score is based on new accounts opened in the last 60-90 days, new applications and inquires to credit. It is important to note, opening too many new accounts or having a large number of inquiries can negatively impact a credit score. 

Credit Length- 15% of the credit score is based on the length of credit history. The longer the credit history, the better. Try to avoid closing accounts that have a lengthy credit history (even if you don’t use them). 

Obtain a copy of your credit at http://www.annualcreditreport.com,  review your credit history using the above factors and make any changes necessary to improve your financial GPA aka credit score.

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