August Blog Series: Building Credit

Credit history refers to your history with paying your bills on time. It is responsible for 35% of your credit score, so if your credit history is bad — your credit score will reflect that. This is why it is super important to pay your bills on time.

Finally, the last blog for our August series that’s been covering everything to do with credit. In this last blog, we want to take all that we have learned about what credit is, how debt impacts it, and we are going to use it while learning about how to build a better credit score.

Over the last three blogs, we’ve learned that our credit score is a three-digit number (which ranges from 300-850) that is reflective of our credit history, credit utilization, debt, length of credit history, diversity of credit, new credit, and derogatory information. We’ve already discussed debt, and in this blog, we will dive into all the other factors that make up your credit score.

Credit History

Credit history refers to your history with paying your bills on time. It is responsible for 35% of your credit score, so if your credit history is bad — your credit score will reflect that. This is why it is super important to pay your bills on time.

Credit Utilization

Credit utilization is a tricky one and it makes up 30% of your credit score. The concept itself is straightforward, it refers to the percentage of credit you used out of the credit available to you. However, you never want to use a lot of the credit available. That’s the tricky part. A good rule of thumb is to only use 30% of your credit line. So, if you have a credit line of $1,000, you should only spend $300 on your credit card each month.

Length of Credit History

Length of credit history just refers to how long you have had lines of credit, it accounts for about 15% of your credit score. If you’ve had a credit card for 10 years, you will be considered less risky than someone who has had a credit card for only a few years. This is because there is more data (credit history) for lenders to look at. Having more data to look at is less risky for lenders because they are able to see more evidence as to how you use your credit.

Diversity of Credit

Diversity of credit or “credit mix” looks at how many different lines of credit you have open, it accounts for 10% of your credit score. This looks at how many credit cards you have, car loans, mortgages, etc. Generally, having one mortgage, one auto loan, and two credit cards are considered a good “mix” of credit.

New Credit

New credit is also about 10% of your credit score, it refers to how many new lines of credit you have or have applied for. It differs from length of credit and diversity of credit because it is only focused on new credit. It factors in how many new credit accounts you have opened, how many new accounts you have applied for, and when the most recent line of credit was opened.

Derogatory Information

While derogatory information doesn’t have a set amount of how much it influences your credit score — if you have any derogatory information, it can really lower your credit score and your ability to open new lines of credit. Having derogatory information on your credit report is a very serious hindrance for your financial well-being. Examples of derogatory information include: any credit account that is 60+ or 90+ days past due, collections accounts, repossessions, and foreclosures. These can stay on your credit report for 7 years, bankruptcy however remains for 10 years. Having any derogatory information on your credit report can hurt your chances for housing, lending, or any opportunity that may have to do with credit.

So, what are some concrete steps you can take to build a better credit score?

A good step, if you’re starting from scratch, is to get a credit card. There are a lot of different credit card options, and it’s important to research and find out what is the best fit for you. As a college student who just opened her first line of credit, I have had very good experiences with Discover. There are no annual fees, and they have a lot of rewards programs, especially for students. However, there may be another credit card company that works better for where you are in life. That’s why it is so important to do research on your own before opening a line of credit.

Once you’ve opened your first line of credit, continue using this information! Pay your bills on time, in full, every month. Try to use 30% of your credit line every month, you don’t want to go over 30%, but you also don’t want to open a line of credit and never use it. Try to stay around 30% to continue looking good for creditors. Make sure to keep it open as well, it can hurt your credit score to close a credit account.

Maybe you already have a credit card, or a few, but you still don’t have the best credit score. A good next step would be to look at why that is, do you struggle to make payments on time? Do you use more than 30% of your credit line? Do you only have one credit card? Asking yourself these kinds of questions and reflecting on your own purchasing habits can be really insightful. However, it can also be really hard to do. Mary Rigg Neighborhood Center offers financial counseling services, we can request a credit report and go over it with you and develop a plan on how to get a better credit score.

No matter where you are in your credit journey, Mary Rigg is here to help. Connect with someone on our Family and Financial Resource team by calling 317-639-6106.