What Makes Up Your Credit Score?

Transcript from the video

Welcome back to Lexington Law and our credit webinar series. Today we’re going to talk about what makes up your credit score.

There are 5 different factors that we know of that build up your credit score. The largest and biggest one at 35% is your payment history. Next at 30% are your amounts owed. From there at 15% we’ll discuss your length of credit history. And then your 2 last components, at 10% each are: Types of credit in use and your new credit.

So let’s discuss the biggest section of your credit score, your payment history at 35%. Working with Lexington Law, you’ll be able to better your payment history by working to remove those questionable derogatory or negative marks on your payment history. We’re referring to those late payments. Lexington Law Firm will work with you to dispute those negative items that are inaccurate, misleading or unverifiable through the credit bureaus, and also through the creditors directly. This will take care of your 35% Payment History.

Next, let’s move onto the amounts owed. 30% of your credit score is built up by the amounts owed. When talking about this, we’re referring to the debt that your have in comparison to the amount of money that’s been lent to you. So let’s say you have a card with a $1000 limit, and your balance is at $500. You’re obviously at 50% of your credit limit. This is about the point where you’re going to start to affect your credit score negatively. Anything past 50% of your credit limit will probably start to lower your credit score.

So some good advice may be to speak with a professional about your amounts owed and determine exactly what would be beneficial in your scenario, whether it’s to transfer some accounts, transfer some balances, or pay down some accounts. Depending on your situation you might want to do things differently. This is why it’s always important to discuss this with a professional.

When we refer to amounts owed, we’re talking about two different kinds of loans: installment accounts and revolving accounts. When we refer to our installment accounts we’re talking about auto loans, mortgages – we’re talking about those loans that have a payment date. So let’s say they’re on a 4-year payment plan or a 30-year payment plan. Where, in comparison, our revolving accounts are those accounts that don’t necessarily have an end date. We have a monthly bill if we rack up any balances. But there is essentially no end date. There might be an expiration date, but we can always renew those accounts. They can revolve, kind of like a revolving door and keep going forever.

Moving on, let’s discuss length of credit history. This makes up 15% of your credit score, so it’s definitely important. You length of credit history, we’re talking about, how long your accounts has been open. So obviously an account in good standing with no late payments that’s been opened for, let’s say, 4 years, is probably going to build your score more so than account that’s just been opened 4 months ago. So, length of credit history, to build a strong credit score in this aspect, we want an account that’s been open for a while. Now, if you’re thinking right now, I only have a few open accounts just recently opened – maybe you’re a recent student, or just younger and just getting into the credit industry and you don’t have a lot of long, open accounts – there are other ways you can build a positive credit history. And the way you can do that, is working with a professional. Lexington Law Firm, as a I mentioned previously, offers great credit score coaching. In this coaching, they can discuss great ways and avenues you can research and dive into to strengthen your length of credit history.

At 10%, next we’re going to talk about New Credit. At only 10% of your credit score, it’s not the biggest factor, but it’s still important if you look at our industry today and recognize that every point counts. With new credit, we’re talking about inquiries – how recently you’ve been applying for credit, or what new accounts you’ve just recently opened.

So obviously if you go and apply for a new mortgage, or you apply for a car loan, they’re going to run your credit. They’ll look at your credit score and determine if you are, or are not a credit risk. When they do this, they’re also going to put a little “ding” on your credit report, or an “inquiry”. Inquiries should stay on your credit report for 2 years. The first year that they’re on your credit report, they could be hurting your score or pulling your score down. The second year of the credit reporting, they’ll just be on your credit report, but they won’t be affecting your score negatively.

To finish up, let’s talk about the last 10% of your credit score, or the types of credit in use. For a good credit score, we’re going to be looking for different types of credit. We don’t want to see 10 different revolving accounts and no installment accounts. Keep in mind, the credit score was originally built for bank and lenders to better understand you and your payment information. So they want to know whether or not you know how to run your finances and how to pay your bills on time. So the different types of credit in use – if we wanted to maximize our credit score – it’s probably wise to have a variety of different types of accounts. Revolving accounts, installment accounts. And again, I’m not giving you advice to go ahead and open all kinds of accounts. It’s always important and smart to speak with a professional about your situation before you actually go and open any other news accounts or close some previous accounts.

So, as you can see your credit score has a lot built into it. If you have any question about your credit score or you’d like to learn more about what goes into your credit score, don’t hesitate to speak with a paralegal at Lexington Law where they’d be more than happy to help educate you and help you learn more about your credit score.

That’s all we have for today, guys. Hopefully you’ve learned a little bit more about your credit score and don’t hesitate to give us a call if you have any other questions.