Money Monday – Cracking Open Credit Scores

Hey money warrior. It’s been a hot minute since I did a Money Monday video. But I’m back today and I’m fulfilling the promise I made to you months ago to break down what you need to know about credit scores.

Credit Scores are the statistical models that lenders use to try and avoid having imitate Rihanna when she sang 🎶 Bitch better have my (bitch better have my), bitch better have my money! Pay me what you owe me! 🎶 See, if Rihanna had checked a credit score she probably wouldn’t have written that banger of a song. Let’s dive into what information a credit score could have given her.

There are two different models used in the US, either a FICO model or the VantageScore model. The two scores put different emphasis on different points, but overall they are pretty similar.

Let’s look at the FICO model first, since it is the most transparent. There are 5 criteria in the FICO score.

• Payment history is the biggest component at 35% of your score. Keeping this part strong is pretty simple: make your payments on time! Lenders look at this history because it can be an indicator of future behavior. They want to know you’re going to payback what you owe. But for this part, keep in mind that they just want to see the checkmark that you paid on time. The amount you paid doesn’t matter. Meaning, minimum payments are better than no payments. 
• The next top impact is Credit utilization counting for 30% of your FICO score. This looks at how much of your available credit is being used. If you use too much, lenders see that as an indicator that you might be building a financial house of cards that could be close to falling down. A tip for boosting this part is to accept credit limit increases. Having more available credit without having more expenses will push your utilization rate down. Just make sure you don’t go spending that limit! This category is where paying off your cards each month makes a difference because it will keep your credit utilization percent down. Your goal should always be to pay off the entire balance each month. But I get that sometimes life happens (although you should have an emergency savings account for these kinds of things). Just because you can’t pay it all off does not mean you will ruin your credit score.
• Length of credit history counts for 15% of the FICO score. This metric helps lenders establish a track record. Just like applying for a job and showing all your past experience, length of credit history shows how long you’ve been at this borrowing game. Because lenders want to see a long history, it helps your score to keep your oldest credit card open. Even if it doesn’t fit your needs, use that old card at least once a year (and pay it off completely right away!) to keep this part of your score solid.
• Next is New Credit, with a 10% weight. To keep this part strong, try to avoid opening lines of credit too close to one another. Multiple new credit lines opened in the same time period is a red flag that you may be in trouble and scrambling for solutions.
• Finally, Types of Credit is last (and kind of least) at 10% of the FICO score. Just like your mom, the credit scorers want you to be a well-rounded person. Being able to juggle different types of credit such as cards, student loans, car loans, a mortgage, all at once shows lenders that you’re organized and have got your shit together. But don’t go and open a bunch of stuff just because you want a mix! This is one of the least weighty categories for a reason.

So that’s the FICO score. The VantageScore uses similar criteria. Although they don’t publish their precise formula, we do know they put slightly different influence on the categories. Instead of percentages, VantageScore shares what level of impact each category has. On-Time Payments still has a very high impact. So no matter what, it would be smart to keep that record clean.

Another tip for you on credit scores: store cards have a different weight than all-around credit cards. Because they can only be used in a specific store and they don’t have any collateral, they can hurt your score.

When you’re think about your score, it helps to know the difference between hard pulls and soft pulls. Hard credit pulls are when lenders take a good *hard* look at your history to determine if they’ll extend a loan to you. You have to authorize these pulls. Too many in a short period of time can be a flag that you’re in trouble. But don’t worry about hurting your credit score if you’re seriously shopping for big purchases. If you’re car shopping, all your loan inquiries pulled within 14 days will be bulked as one hard pull, no matter how many lenders check your score. Similarly, when you’re looking for a good rate for a mortgage, you have 30-45 days to shop around under one hard pull.

Soft credit pulls are when you’re just looking at your own information and they don’t ding you. Go and pull your annual credit history once a year to make sure there isn’t anything fraudulent or funky on your history. This will be a soft pull and won’t impact your score.

Remember, that different credit scorers use different criteria and you don’t know what one a potential lender might look at, so it makes sense to check all the scorers.

So there you have it! A quick-n-dirty run down on credit scores.