Sophie Explains

What is a credit score? Ads are always offering to help improve it, so it must be important! A credit score is a number that ranges from 300 to 850 and is a measure of borrower reliability. Lenders, such as banks and credit card companies, use credit scores to evaluate the probability that an individual’s debts will be repaid. There are six different factors that contribute to the overall number.

Millennials have an average credit score of 634, which translates to a “Poor” rating. (Source: BadCredit). I believe this score is low due to a lack of knowledge, so let’s learn more about credit scores today!

Mint.com offers a free way to look at your credit score. When you first click on the button to see your credit score, the website may ask you a series of questions about possible loans or mortgages you have (or do not have) to verify your identity. I suggest taking a few minutes now to complete this step. (If you use another website to see your score, let me know what you use and if I should check it out!)

How does your score match with the average credit score for millennials? See below to find your ranking.

• 720 or More: Excellent
• 660 – 719: Average/Fair
• 620 – 659: Poor
• 620 or Lower: Bad

If you are not happy with your score, adjusting your spending habits and being patient can help you increase the ranking. Below we discuss the individual factors that affect your score in detail.

The Six Credit Score Factors

High Impact Factors

1. On Time Payments: Setting up an automatic payment between your bank account and credit card is the best way to stay on top of your credit score. Late payments can have a major negative effect on your credit score.
   1. Bonus Tip: If you pay the balance on your credit card account before the monthly bill is released, this will not affect your credit score. You have to wait until your monthly bill is released before paying the full balance to have any positive effect. (I know. How strange!)
2. Staying Below 30% Usage: Take note of your credit card usage limit and make sure to try to stay below 30% each month. Sometimes this means using cash, debit cards, or other credit cards instead of maximizing use of just one card.

Low Impact Factors

1. Average Age of Credit: Luckily this is a lower impact factor. Those of us starting out with new credit cards will automatically have a poor rating in this section. It is a good idea to keep older lines of credit open to help this factor.
2. Total Accounts: A higher number of total accounts is beneficial for your credit score because it shows that more lenders trust you. This total comes from your various loans, mortgages, credit cards, etc.
3. Credits Inquiries: Inquiries stay on your report for two years and occur when you apply for any lines of credit (credit cards, loans, etc.). It is inevitable that this category is poor when you start opening your first lines of credit, but make sure that you do your research so that you do not apply unnecessarily and get rejected, which will reduce your score.
4. Derogatory Marks: This includes credit accounts in collections and bankruptcy. Pay those bills on time! If you do have any derogatory marks, it takes over seven years to clear these from your history, so patience is your friend.

This topic is very important, but it is also one of the most confusing personal finance topics in my opinion. Clear answers to questions about credit scores are hard to come by, so if you have any trouble with this information, please reach out, and I will happily do my best to help you find an answer! Good luck and happy credit building!