When you think of credit, what first comes to mind? Often, we believe the only time credit is useful is when it’s time to make large purchases. While it’s important to ensure you have the best options available when making milestone financial decisions, this isn’t the only time that credit or more specifically your FICO® Score should be considered. In order to gain a better understanding of how our credit scores are impacted by everyday decisions, we’ll walk through a series of real-life scenarios. These normal occurrences can help change your perspective of how credit actually works.
Payment history (35%)
You have continually loaned money to someone and they have yet to make any timely payments. Or you’ve covered a few of the tabs for a friend and they don’t make a consistent effort to pay you back. In either case, would you be so willing to lend them money again in the future? Lenders want to have full assurance with proof showing you have the ability to pay your creditors back consistently and on time.
Amount owed (30%)
Let’s say a family member reached out to you for a personal loan, and you’re also aware that they owe quite a few other family members. Are you confident that they are able to pay back what’s being borrowed? Using credit within reason does not mean you are a high risk-borrower. Make sure that you are using credit within reason and are confident that you have the ability to pay back what is being used.
Length of credit history (15%)
If you had to choose, would you lend money to someone that has a proven credit track history of 10 years versus two years? Lenders view your oldest accounts, newest accounts and determine an average based on this information. However, individuals who haven’t been using credit for long may have high FICO® Scores, depending on how the rest of their credit report looks.
Credit mix (10%)
Think about your favorite dessert or homemade dish. Most likely, there will be at least a handful of ingredients that create this masterpiece. Your FICO® Score isn’t any different. Lenders like to see that you are able to juggle a few different types of accounts – such as credit cards, mortgage or installment loans. Keep in mind that is not an indicator that you need to utilize specific credit types, if you don’t have a specific need.
New credit (10%)
During this particular time of being stuck at home, there may be an increase of online shopping – which can tempt you to open new lines of credit all at once. Doing so creates multiple hard inquiries on your credit report, which could affect your average of credit history and your FICO® Score. Be sure to measure your emotions with your needs, cabin fever has a way of elevating impulse purchases.
As a reminder, use credit as a resource based on your needs. Grab hold of your short-term and long-term desires and reflect on those moments when temptation comes knocking.
I am an official brand ambassador for FICO. While I receive compensation for my participation as a brand ambassador, opinions are mine.