Poor credit can affect so much more than just your borrowing. It can affect your job opportunities, your employment, even your love life. So... What is credit? Your credit score or credit history is simply a measure of your credit worthiness. It's an extremely simplified present day rating of your ability to pay back future debts. The better your score the more borrowed money it seems you'd be responsible with handling.
The Fair Isaac Corporation (FICO) has been the credit industry's standard for over 25 years. To the tune of 90% of lending decisions are made with the FICO systems. That 90% means there's other credit standards that exist, but I'll get into that in later videos.
Experian, TransUnion, Equifax are the three major credit bureaus. They collect all of your credit data and generate credit reports from your data. Bureaus pay FICO to use their systems summarized under their established criteria into your FICO credit score.
But there's more than one FICO score and report (19 at the time of this recording, more coming soon). There's base FICO and industry-specific FICO. Base FICO is the general score that encompasses every aspect of your credit. Industry-specific FICO is a much more focused score looking at your credit history only in that genre. So You've got one for mortgages, for auto loans, for credit cards and other revolving credit.
10% - Credit inquiries/new credit
How often are you needing to borrow money?
Hard inquiries - a creditor checking for a new loan, new credit card. These will fall off approximately every two years sometime sooner sometimes later. if something doesn't automatically come off after two-year span than contact that creditor they will generally take it off immediately.
Soft inquiries - checking your own credit score, your bank checking, credit karma, card providing you your FICO. I REPEAT, CHECKING YOUR OWN SCORE DOES NOT AFFECT YOUR CREDIT.
But say you open 3 new lines of credit in 3 months, that doesn't look sexy because it looks like you're over extending yourself and need maybe more than you can bare.
0 is excellent
1-2 is good
10% - credit mix / total credit accounts
How many different types of credit do you or have you had that you were able to manage? Car loans, mortgage, credit cards , etc. But also how many?
It's recommended to have over 20 accounts, open and closed, in order to have excellent credit. But again, this is a low factor and won't affect you significantly if say you only have 10 accounts.
15% - Length of credit history
How long can you maintain an open line of credit? How long have you been fiscally responsible?
Yes this looks at your longest open line of credit but also your shortest, because it looks at your average length of open credit lines. The longer your average, the longer you're seen as responsible.
Over 9 years to be considered excellent. So if you have a lot of new credit it will be a while before you see this category impact you positively.
30% - credit utilization
How much credit do you have to your name?
This is a good time to explain the difference with revolving (open end) credit and closed end credit. Revolving credit is a continuous line that you can add and subtract credit (through payments) to but with a maximum amount that cannot be exceeded (credit cards, home equity lines). Closed end has set terms and conditions agreed upon between a borrower and lender when opening the line (mortgage, personal loans) there is no deviation and you will only be making payments.
This category largely looks at revolving credit. To get your credit utilization add all you available credit and add all of your used credit. Divide your used credit by the available to get you percentage of credit used. It is ideal to stay under 30% of utilization, but you'll need under 10% for excellent.
35% - on time payments
Are you going to pay back?
If you haven't paid back what you already had on time how will you payback having more credit to pay back.
This one's pretty self-explanatory pay what you owe on time! This has the least margin of error. to have excellent you need a hundred percent on Time payments. Poor is less than 97%. That means if you have a hundred payments to make, if you make over 3 late payments your credit will drastically drop. I made one late payment over 3 years ago and it still keeps me at 99%.
I'd also lump bills that go into collections or leave derogatory marks on your credit to fall here. Derogatory marks hit your score even harder than late payments. But what's worse is it can take up to 7-10 years for either to be expunged from your history.
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