What Makes a Credit Score?

Dean Myerow Credit Score

Anatomy of a Credit Score

Most Americans are denied the education necessary to understand their credit score. The term “credit score” itself is thrown around in television advertisements as though its definition is common knowledge. Your credit score is a 3 digit number which gauges your credit habits and credit worthiness. Credit scores can be a great indicator of someone’s credit habits but it isn’t always the determining factor when applying for a loan or credit. (Check out “Understanding Credit Card Terms” for more information.)

Credit scores usually range between 300-850. Use this table (via Credit Sesame) to find out where your credit score ranges.

Credit Scores
850 is a perfect score. Below 550 needs some work. (via Credit Seame)

In order to determine your credit score a series of factors are taken into account.

  1. Your Payment History

    35% of your credit score is determined by your payment history. That being said, the best way to improve your credit score is to have good payment habits. Be sure to pay your bills on time every month and avoid paying the bare minimum payment.

  2. Total Amount of Credit

    The total amount of credit you have access to makes up another 30% of your credit score. Having a high amount of credit is a positive indication that you are a good “bet” for future lenders to sign you up.

  3. Length of Your Credit History

    Your credit history’s length of existence makes up 15% of your credit score. Time is an important factor in all of these categories. When determining your credit scores, the bureaus will factor in how long you’ve had credit and how long it has been since your last account was opened. Opening many accounts in a short period of time will have a negative effect on your credit. Paying on time for an extended period of time without opening additional accounts will effect your score positively.

  4. Accumulation of Debt

    Your accumulation of debt in a 12 – 18 month period accounts for 10% of your credit score. If you rack up a large amount of debt in a short period of time it will hurt your score. Keeping your total debt at a steady or decreasing level with increase your score.

  5. New Accounts

    The last 10% of your credit score is determined by new credit accounts. When you first open a new credit account your credit score will take a hit. Most likely, in order to get approved for this new account you had your credit report pulled. This is called an inquiry and will also effect your credit score negatively.  The more inquiries you have in a 12 month period, the more it will hurt your credit score.

More to Consider

Now that we know the major factors that effect your credit score it is important to know that these are not the only things to consider. In order to avoid hurting your credit score it is important to understand all of the ways it can happen. Here are some examples of actions that can hurt your score:

  • Missing a Payment.
  • “Maxing out” an account.
  • Closing your credit accounts.
  • Opening many accounts in a short time period.

Understanding some harmful behaviors that can hurt your score, now we can focus on improving our scores. Here are some guidelines to help you get your number up:

  • Paying your bills on time.
  • Paying a significant amount towards an account. (avoid the bare minimum)
  • Avoid opening or applying for too many new accounts in a short time period.
  • Keep your credit utilization around 30% of your total credit.

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Dean Myerow
Dean Myerow is a municipal bond market asset manager and along with partner, Sean Vesey the team structures institutional and high net worth investor portfolios at Las Olas Wealth Management of NatAlliance Securities LLC.

For 20 years Dean Myerow has been a professional in the field of municipal bonds. He has earned degrees from the University of Massachusetts School of Business and the University of Miami School of Law.

Check the background of this investment professional on FINRA’s BrokerCheck.

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