Credit Where Credit is Due: Understanding Credit Scores, Part 2

In part one of our series, we began to explore the often-vague world of FICO scores, more commonly known as credit scores. In part two, we will dig deeper to understand the specifics of how the scores are calculated, and, more importantly, how to improve your score.

To refresh your memory, here are the five main factors that are evaluated when calculating a credit score:

  • Payment history
  • Total amount owed
  • Length of credit history
  • Types of credit
  • New credit

Now, it’s very important to understand that all five factors are not equally important. Payment history accounts for 35%, total amount owed for 30%, length of credit history 15%, types of credit 10%, and new credit, usually inquires, 10%.

Knowing this, you can begin to prioritize and make improvements to your score, such as:

  • Pay your bills on time: Six months of on-time payments are required to see a noticeable difference in your score. 
  • Increase your credit line: Call and inquire about a credit increase if you have credit card accounts. If your account is in good standing, you should be granted an increase in your credit limit. However, it is important not to spend this amount so that you maintain a lower credit utilization rate.
  • Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account.
  • If applying for a joint loan with a co-borrower—obtaining a mortgage with a spouse, perhaps—keep in mind that BOTH borrowers have their credit scores evaluated, with the borrower with the LOWER score generally being the deciding factor for the overall creditworthiness.

Your credit score is one number that can cost or save you a lot of money in your lifetime. An excellent score can land you lower interest rates, meaning you will pay less for any line of credit you take out. But it’s up to you, the borrower, to make sure that your credit remains strong so you can access more opportunities to borrow if needed.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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