A credit score is an important metric that affects many areas of our daily lives. It helps us get approved for home purchases, car loans, and lower interest rates on credit cards. Knowing what makes up a credit score can help you ensure yours is in good standing. Generally speaking, credit scores are based on factors such as payment history, total debt, age of the accounts held, types of credit used (auto loan versus revolving line of credit), and recent activities such as opening new accounts or inquiries by creditors.
There is a flurry of news today about a survey that indicates 43 million Americans, or 22 percent of the population have carried a balance to improve their credit score. Stories at CNBC, Orlando Sentinal and KPAX television suggest that consumers were duped into carrying a credit balance so that the credit bureaus would recognize that the consumer was paying responsibly. From the Orlando Sentinal, we hear…
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About 43 million Americans wrongly believe that carrying a balance on their credit cards will help improve their credit scores, a report released Monday shows.
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The report by CreditCards.com found that 22 percent of U.S. consumers made this mistake, which forces cardholders to pay more in interest, often at high rates.
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“It’s painful to know that so many millions of Americans are essentially attempting to pay their card issuers to improve their credit scores,” said CreditCards.com senior industry analyst, Matt Schulz in a news release about the study. “The fact of the matter is that carrying a balance will never improve your credit.
Sensational news? Fake News? How did we get off on that tangent? And, why do so many American’s miss the point about their credit score?
The answer is easy and transparent at FICO’s site. Written in simple English, as shown below.
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Payment history—approximately 35 percent of a FICO® Score Have you paid your credit accounts on time? Late payments, bankruptcies and other negative items can hurt your credit score while a solid record of on-time payments helps your score.
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How much you owe—approximately 30 percent of a FICO® Score FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances and how much of your available credit you are using.
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Length of credit history—approximately 15 percent of a FICO® Score A longer credit history will increase your score. However, you can get a good score with a short credit history if the rest of your credit report shows responsible credit management.
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New credit—approximately 10 percent of a FICO® Score If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history.
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Other factors—approximately 10 percent of a FICO® Score Several minor factors also can influence your score. For example, having a mix of credit types on your credit report—credit cards, installment loans and personal lines of credit—can add slightly to your score.
Similar content can be found at the major credit bureaus, including Experian, Equifax, and Trans Union.
Another myth busted, and the answer was there all the time!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
