I remember back in college, that no one knew a thing about credit scores. ‘If you leave 20% on your card each month, you’ll have a higher credit score, because credit card companies like seeing that they are making money off of you.’ Having the gut reaction that this just wasn’t true, I decided to investigate what truly makes up your credit score. Your “credit score’ is really your FICO score, determined by a number of factors in your life. Ranging from 300 to 850, having a better credit score can allow you to borrow money cheaper than others, obtain a home loan, a car loan, or in our case, receive rewards earning credit cards! Here’s how it’s determined:
35% Payment History
This is where not paying your credit card bills most affects you. If you want to have a good credit score, be sure to pay at least the minimum payment each month, or face a much higher interest rate on your payments. I always maintain that to get the best value out of your travel credit cards, spend only what you can pay off each month. Every dollar in interest takes away from the value of the points you receive from the card. I’ve heard horror stories of people running up large bills on their cards to meet spending requirements, or ‘earn’ points, but in reality, they are only hurting themselves with bills they cannot pay back.
30% Credit Utilization
This is the outstanding debt on your account. Typically, you want to keep your outstanding balance below 20% of your total credit. So, if you had a $10,000 credit line, keeping your spending below $2,000 will help your score greatly. A misconception that I hear often is that having too many cards open can hurt your credit score. As someone who has quite a bit of cards, this simply is not the case. However, if you are using all of that credit each month, that is a bad thing in the eyes of FICO.
15% Credit History
The longer you have credit, the more at ease banks are with lending you money. It’s that simple. Also, NEVER cancel your first credit card, as it will wipe away a lot of your credit history in the process. This will then ‘shorten’ your history in the eyes of FICO, and as such, negatively drive down your score.
10% Types of Credit
This means having student loans, credit cars, mortgages, etc. The more types of credit you have, the more responsible you look to credit agencies. I live by the rule to never borrow if you don’t have to, but if you do over several different types of loans, might as well help your score in the process!
10% Credit Inquiries
This affects us travel credit card users the most, since we apply for so many cards. While 10% in the grand scheme of things isn’t a lot, and this portion of your credit score is most often refreshed, it’s always good to minimize the amount of credit inquiries on any account.
That’s a basic primer on your FICO score, and what credit is. Knowing your score can better assist you in determining if you will be approved for some of the wonderful credit cards out there. If you have any questions, please feel free to sound off below in the comments!