New to Live Richer Challenge: Credit Edition? Learn more about it HERE.
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Day 1: Credit Goals
Day 2: Credit Basics
Day 3: Grab Free Credit Reports
Day 4: Grab Free Credit Scores
Week 1: Credit Knowledge
Day 5: Credit Score Calculations
Today’s Easy Financial Task: Learn how your credit score is calculated.
How to rock this task:
- Learn how your credit score is calculated
- Download Credit Score Decoded from MagnifyMoney
Woot, woot! Day 5, friends!
Today’s an important day. We’re diving into the factors that affect your credit score.
In total, there are five areas of your credit history that are used to calculate your credit score. Some components are more impactful to your score than others.
What’s the purpose of this task?
In order to increase your credit score, you will need to identify the factors from your credit history that are hurting your score so you can make improvements.
So, let’s get started!
The five factors used to calculate your credit score include:
- Payment history: 35% of your score
- Amounts owed: 30% of your score
- Length of credit history: 15% of your score
- Type of debt: 10% of your score
- Inquiries: 10% of your score
Let’s break down the importance of each one:
Payment History (35% of Your Score)
Of all of the components, this one is the most influential. Your ability to pay your current bills on time is a good indicator of whether you’ll be able to pay bills on time in the future. Late payments make you appear less creditworthy and, as a result, can do quite a bit of damage to your score.
Amounts Owed (30% of Your Score)
Amounts owed is how much debt you’re carrying. Having a high amount of debt owed could mean you’re having trouble paying your bills and is another red flag for companies measuring your creditworthiness.
There are three key factors that go into determining your mark in the amounts owed category including your credit utilization, amounts owed on installment loans, and overall balances.
Let’s discuss each one in detail:
Your credit utilization is how much credit you’re using on revolving accounts. Revolving accounts are credit lines that you can keep a revolving balance on from month-to-month like your credit card. To calculate your utilization, you:
- Add up the credit limits on your accounts
- Add up the balances on your accounts
- Divide your balance by your credit limit
- Multiply by 100
For example, if you have a credit card limit of $1,000 and your balance is $500, you’re utilizing 50% of your available revolving credit.
Here’s another example: Say you have two credit cards and each one has a $1,000 credit limit (that’s a $2,000 credit limit in total). If one card is maxed out with a $1,000 balance and the other one has a zero balance, your credit utilization is also 50%.
Your goal is to keep utilization at 30%, but even lower is better.
How Much You Owe On Installment Loans
An installment loan is a loan that has a set amount of payments and a set loan term. Examples include your mortgage and auto loans. Having less owed on your installment loans has a positive effect on your amounts owed.
How Many Revolving Accounts You Have With Balances or Have Maxed Out
Finally, the amount of revolving accounts (i.e. credit cards) that you have with a balance, or have maxed out the credit limit, will have an impact on your mark in the amounts owed category.
Length of Credit History (15% of Your Score)
The longer your credit history, the better. Your credit card history is calculated using an average.
Here’s an example: If you’ve had a mortgage for 15 years, a credit card for 10 years, and another credit card for two years, the length of your credit history equals nine years.
Keep this in mind before you close any of your accounts. Even if you pay off an account, closing it can significantly shorten your average history.
You also want to be careful of adding new accounts. From our example, you can see how the card that’s only two years old has shortened the average history length. The average credit history would be three and a half years longer without that credit card.
Installment loans are treated differently than your revolving credit (i.e. credit cards). When you pay off a loan, the account is closed and no longer appears on your credit.
Type of Debt (10% of Your Score)
We’ve touched on the many types of debt you can have so far. A few examples being: credit cards, mortgages, auto loans, and personal loans.
Having a mix of accounts that are in good standing shows that you can manage various forms of debt responsibly – which can have a positive impact on your score.
Credit Inquiries (10% of Your Score)
A credit inquiry is when someone you authorize to look up your credit does a credit check. Too many credit inquiries can ding your credit score a few points and stay on your report for two years. Be cautious with who you allow to check your report.
It’s Time for Review
Now that we’ve covered the five components of your score, dig into your credit report(s) to see where you stand with each one.
Take out a highlighter or pen and note the positive and negative. We’ll circle back on how you can make improvements in the areas you circle next week.
As a supplement to the FICO score overview in this task, I’ve provided you with another awesome download from MagnifyMoney. This tool goes even further into detail about how your credit score works.
Download it HERE.
That’s all for Day 5, Dream Catchers!
Tomorrow is a day to review the tasks from the last five days. Starting next week, we’re getting to WORK! This week was all about Credit Knowledge. Next week is all about Credit Improvement. Get ready to take action. 🙂
Leave a comment below or reach out to your accountability partners if you have any questions. Don’t forget to check into the Dream Catchers: LIVE RICHER group as well.
Share what you’ve learned today with your tweeps:Today I learned how my credit score is calculated. Woot Woot! Day 5: #Liverichercredit Click To Tweet
P.S. Don’t forget to get your free Live Richer Challenge: Credit Edition Starter Kit. Get it HERE.
P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.
You can also reach out to me here:
Facebook: The Budgetnista
Private Forum: Dream Catchers : LIVE RICHER
*** Need Help? Feeling Overwhelmed? Want to work with someone one-on-one to improve your credit? Netiva “The Frugal CrediTnista” is offering her renowned, full credit improvement services & consultations at a special discounted price just for Dream Catchers! And there’s also a FREE Live Richer Credit Repair Toolkit with your name on it! Learn more and get the help you need, HERE. ***
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