Have you ever been in this situation?
You’re sitting across from a salesperson about to make a major purchase and they start clicking away at a keyboard to pull up your credit score. You start to worry. Did you pay that credit card on time? What about that time you were late paying your electricity bill? Did you ever close the Columbia House CD subscription you had in the 90s?
Then you breathe a sigh of relief when the person across from you deems you creditworthy of purchasing what you want.
Why is Good Credit Important?
Today’s economy runs on credit. If you want to get a mortgage for a house or a student loan to pay for college—or if you just want to charge your lunch on a credit card—you’re going to need a lender to extend you a line of credit.
You’ll also need to be worthy of that line of credit. Your creditworthiness is defined by your three-digit credit score and is the key to your financial life. Good credit can be the make-or-break detail that determines whether you get a mortgage, car loan or student loan. Bad credit, on the other hand, will make it difficult to get a credit card with a low interest rate and more expensive to borrow money for any purpose. (BankRate)
So, you know you NEED credit but if you’re like most people, you only have a vague idea of how your credit is calculated. And that probably leaves you with a feeling of uncertainty.
3 Ways Your Credit is Calculated (and how to stay on top of things)
- Payment history: Thirty-five percent of your FICO credit score is payment history. Any late payments are on your report for seven years. Bottom line: pay early and pay often.
- Credit Balance: This makes up 30% of your FICO credit score. Bottom line: aim to keep credit card usage under 10% if possible.
- Open Accounts: This makes up 15% of your FICO credit score. Bottom line: the longer you have kept your account open, the better.
The other 20% is everything else.
Now that you know how your credit is calculated, you can pay attention to the “big things.” Make sure you’re staying on top of your bills and not running up an obscene amount of debt. Credit is a wonderful tool if used responsibly – but can quickly get out of hand if you’re not paying attention.