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What Goes into Your Credit Score?

New year, same credit score... it's time to fix that. Here's a breakdown of what makes up your score and what you should pay attention to in order to boost your rating this year.

By Brad Wright, CFP

Happy New Year!

Now that the celebrating and gift-giving is behind us, it’s time to focus on, ugh… paying the bills (and avoiding COVID). The sooner you pay off your credit card debt, the better.

Brad Wright, CFP®, is co-founder of Launch Financial Planning, LLC, a fee-only firm located in Andover, MA. He is a frequent contributor to WCVB-TV and Mix 104-1 Radio. Brad is past-President of the Financial Planning Association of Massachusetts. Learn more about Brad at www.LaunchFP.com

Brad Wright

Whether you realized it or not, you began building your credit score with your first credit card or loan. Your score can move up or down and will shadow you for life. It becomes a factor when you apply for a mortgage or auto loan, rent an apartment, purchase an insurance policy and even apply for a job. I’m hearing more stories of young couples checking each other’s credit scores before committing to a serious relationship, as money is a large contributor to divorce.

Here are five contributors to your credit score.

  • Payment History: Pay your bills on time because your history counts for 35% of your credit score.
  • Amount Owed: This contributes 30% to your score and refers to your Credit Utilization Ratio: What proportion of your credit limit are you using? If you max out all of your credit cards, it will impact your score and drive it lower.
  • Length of History: The longer credit history you have, the better, assuming it’s positive. The age of your oldest credit line and the average age of all of your credit lines are added together to make up 15% of your score. Keep in mind that closing a credit card could negatively impact your credit score. This is because your total credit limit falls, and your Credit Utilization Ratio rises. It’s not generically true that you shouldn’t close credit cards that no longer make sense for you, but mind when you close them. If you’re about to apply for a loan, you may want to wait until the loan is approved and funded.
  • Credit Mix: This data point figures in for 10% of your overall score. This is a combination of Revolving Credit, such as credit cards, and Installment Credit, like mortgages, and student loans. Having a bit of both can help your score.
  • New Credit: This comprises the final 10%. New credit is a combination of new accounts opened in the past year and how long it’s been since you opened your most recent account. New credit is tracked by how often there are inquiries into your credit report. Each time you apply for a loan, the lender runs your report, and it counts as an inquiry. As an example, if you walk into five auto dealerships to price your next car, each dealer will want to run your report. When you proactively check your own score at either AnnualCreditReport.com or directly from the three credit bureaus, that doesn’t count as an inquiry, and you should be doing this annually.

Check Your Credit Score

It’s important to either subscribe to a credit monitoring service from one of the three bureaus or check your credit score annually to make sure there are no mistakes and that no one has attempted to steal your identity. When I applied for my first home mortgage in 2004, our mortgage broker called and told me that I had unpaid debts on my report. When he sent me the report, I quickly noticed that the associated debts were linked to a different social security number than mine but were somehow included in my report. That was definitely a mistake and one that my mortgage broker was able to clean up by calling the reporting agency. Had I been keeping tabs on my credit report, I probably would have found the mistake before applying for a mortgage, making the process a bit smoother.

You can check your score in the following ways:

  • AnnualCreditReport.com: Federal law allows you to obtain a free copy of your credit report every 12 months from each credit reporting agency.
  • Alternately, you can also go directly to the three individual bureaus:

Understand Your Rating

Here’s the rating your credit score translates to:

  • Excellent: 800 and higher
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669 
  • Poor: 579 and below

It makes sense (and saves dollars) to pay your holiday bills on time and in full if you can. Cheers to a happy and healthy New Year, and an increase in your credit score.

About the author: Brad Wright, CFP®

Brad Wright, CFP®, is co-founder of Launch Financial Planning, LLC, a fee-only firm located in Andover, MA. He is a frequent contributor to WCVB-TV and Mix 104-1 Radio. Brad is past-president of the Financial Planning Association of Massachusetts. Learn more about Brad at www.LaunchFP.com

The opinions penned here are for general information only and not intended to provide specific advice or recommendations for any individual.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Brad Wright.