Credit 101

You might have thought that the SATs were the last score that mattered to you, but you’d be wrong. Your FICO score will affect you in a much bigger way and for a longer time.

The perfect concoction for an ideal credit score is not an ephemeral magical mystery. Although there are different versions of credit scores, there are five categories of data that contribute to your FICO score (according to Fair Isaac Corporation—originally called Fair, Isaac and Company, where we get the acronym “FICO”). Because these numbers are so important in many different areas, you need to understand what goes into your FICO score.

What affects your credit score?

According to Fair Isaac (and let’s hope he’s fair), your FICO score is calculated from different data in your credit report, grouped into five categories.

The two biggest:

• Payment History (35%) – You wouldn’t want your boss paying you only when s/he could or felt like it…credit card companies see it the same way.
  • Accounts considered in payment history include:
    • credit cards
    • retail accounts like department store credit cards
    • installment loans like car loans
    • finance company accounts
    • mortgages
  • Negative factors include:
    • bankruptcies
    • foreclosures
    • lawsuits
    • wage attachments
    • liens
    • late or missed payments
• Amounts Owed (30%) – If you have a large outstanding balance relative to your credit limit, you are overextended and considered a high risk.
  • Different factors are considered, including:
    • amounts owed on all accounts and on different types of accounts
    • credit utilization ratio (the percent of available credit that you are using) on revolving accounts like credit cards (i.e., are you maxing out your credit cards, which is not good for your score)
    • how many accounts have balances

These also add up:

• Length of Credit History (15%) – Track record is everything. Having a long credit history will help your score, but you can still have a high score without a long history if certain other factors are in place.
  • Factors considered in evaluating the length of credit history include:
    • the age of your oldest account, your newest account, and the average age of all your accounts
    • how long certain accounts have been established and
    • how long it has been since certain accounts have been used
• New Credit (10%) – If you apply for and open five new accounts at once, something’s going on. To a credit agency, you look like a risk. Try not to open a new credit card, your Banana Republic card, and a Forever 21 store card in the same week. You’re not going to be forever 21, so learn to adult.
  • Factors considered include:
    • how many new accounts you have and whether they were opened too quickly
    • how many recent lender inquiries (requests for your credit report or credit score, also called “hard pulls” of your credit)
    • how long since you opened a new account
    • length of time since credit report inquiries were made (inquiries remain on your report for two years but are only counted from the previous 12 months)
• Types of Credit (also called Credit Mix) (10%) – This category looks at your mix of credit cards, retail credit accounts, installment loans, finance company accounts, and mortgages.
  • This category also looks at the total number of accounts you have.
• Other Considerations
  • Just starting out:
    • If you pay your rent, utilities, and credit cards on time and in full, you at least look like a functioning adult. Simple things like paying your rent and utilities in college are an excellent way to start, assuming you can pay each month on time. Even if those items are not reported to the credit agencies, you will be forming good habits to build upon later on.
  • Not having a credit card is not a good strategy:
    • According to the Fair Isaacs website: “People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.”

Why do I even care?

Yep, buying a home seems like a major adulting move, but one day something like this is probably going to matter. Want those 0% APR checks? A lower rate on credit cards or loans to help with major life decisions? Yes, your credit is going to matter. Your future employer or landlord may even look into your credit history before making a decision about you. This is such an easy thing to maintain, as well as to mess up. Don’t mess it up.

Who controls my credit score?

There are three main credit-reporting companies that get searched when someone looks at your credit. They are:

• Equifax – P.O. Box 740241, Atlanta, GA 30374-0241: 1-800-685-1111
• Experian – P.O. Box 2104, Allen, TX 75013-0949: 1-888-EXPERIAN (397-3742)
• TransUnion – P.O. Box 1000, Chester, PA 19022: 1-800-916-8800

How do I protect myself?

Given the possibility of data breaches and the need to protect yourself from identity theft, there are steps you can take to monitor and maintain control of your credit profile.

• You can check your credit report for free once a year from each of the three credit-reporting companies here. (See Federal Trade Commission Consumer Information: Free Credit Reports.)
• Try one of the credit-monitoring sites like:
  • Mint.com
  • CreditKarma
  • CreditSesame
  • CreditWise (CreditWise is from Capital One, but you don’t have to be a Capital One customer to use the free service.)
  • Many credit-card companies will provide you with your free credit score, which you can monitor on a monthly basis to look for unusual changes.
• If you suspect a breach has occurred, you can place a security freeze on your credit report to prevent it from being available to third parties. This can help prevent someone from fraudulently opening a new account under your name.