All About Your Credit Score

There are 3 credit bureaus:

• Equifax
• Experian
• TransUnion

     These organizations collect information monthly about your credit from the financial institutions that loan you money on credit – banks that issued you credit cards, mortgages, student loans, auto loans, etc. The difference between the 3 is that not all of them collect data from the same banks, so the information on the credit report that each produces will be different. The bureaus are privately-owned but do have government regulations. FICO is an organization that produces a credit score based on each bureau’s report. Therefore, every individual has 3 credit reports and, in turn, 3 credit scores. The scores range from 300-850. The score indicates to a potential lender that the higher the score, the more trustworthy you are to be lent money. It seems like no one knows the exact formula FICO uses to calculate the scores. What is known is the following chart, which shows the different factors, along with their percentages of affecting the score, which go into the calculation. The actual translation of these percentages into the FICO score is unknown. Examples of this unknown will be shown as we discuss each factor individually. Warning: There are many sites out there promising free credit scores. These are not your actual FICO scores. There are other organizations that view your credit report and have their own algorithm for creating scores. It's very nice, but it's not the scores that banks look at when approving you for new credit. Are they close to your actual score? Maybe, maybe not. As it's a different calculation, don't bank on it. Only trust your FICO score. Many of the popular credit card banks (AMEX, Citi, Barclays) now offer your actual FICO score if you have a card with them. Quick point I'd like to make: After rejecting a credit card application, a Chase rep once said, "Even though I can see your credit score – and it's good – we really look more at your credit report than your score to determine how truly creditworthy you are." Everyone kills themselves trying to get a good credit score, but for the purposes of collecting miles, it's really more important to focus on keeping up an impressive credit report. The discussion of the credit score pie chart below can really inform you about maintaining a good report as well.

(https://www.toplinecu.com/Files/charts/credit-score-pie-chart.jpg)

• Payment History
• Simply, “Do you pay your bills on time?”
• Seemingly, if you have always paid all your credit card bills on time, your credit report would show all accounts paid on time, and you’d have a full 35% towards a perfect credit score. The calculation measures how late the payment was, how much was owed, how recent the late payment was and how many late payments you have. That much is found on FICO’s website, but the exact calculation to figure out how much of the 35% you’ve earned is unknown.

• Amounts Owed
• Also known as Debt-to-Credit Ratio or Utilization Ratio.
• This is a ratio of the amount you owe on your credit cards (your debt) to the amount you technically have been lent/could be using (your credit). The banks want to see that you are utilizing very little of the amount they allow you to borrow (for a credit card, this is known as the credit line/limit on the card – how much you can use each month). This is a monthly calculation. Therefore, if you used a lot of your credit one month, you may have a high ratio (which is bad) right now, but if you pay it off soon, next month’s ratio will be low again. 
• 2 things are looked at here: 
• The ratio on each of your credit cards. 
• The total ratio of all your cards combined. 
• Having a ratio over 30% is bad, under 30% is good, but the supposed ideal ratio is 7-10%. Why not aim for 0%? Because the banks looking at your credit report trying to decide if they should allow you open a new credit card aren’t going to be too willing to give you a new card if you ratio is 0% - it means you don’t use your credit. Why should they all of a sudden give you more credit? At the same time, I've also heard that having just a few dollars hit your monthly bill is the ideal. The important thing is not to let your bill close with very high dollar amounts on it. There is a trick to spending money on your cards without it affecting your ratio. Your balance is only reported to the bureaus after your statement date. Therefore, if you pay off part of your balance before your statement date, then only what's left of your balance on the statement date will be reported. Pay off most of your balance every month before that date (you can find the date on your statements or by calling the bank and asking), but leave some money on there so that, again, it looks like you're using your card, just conservatively. Again, it is unknown how these ratios figure into the 30% that this category makes up of your credit score.
• This ratio is also the cause of fear behind the greatest concern of your credit knowledge – closing credit cards hurts your credit. Right? Wrong. It's actually the greatest myth of your credit knowledge. How so? Closing a card would technically lower the denominator in this ratio since you just lost that credit line. With a lower denominator, the ratio should be higher, hurting your score. But, there's a simple trick to avoid this. Before you ever close a card, ask the bank to transfer your credit line onto a different card that you have with them. Your other card will now have additional credit equaling that which you lost by closing the first card, keeping the denominator in the ratio nice and steady.

• Length of Credit History
• 3 lengths are calculated here:
• How long have you had a line of credit? This means your very first credit line. For most people, it’s their first credit card. And that’s why people say to open your first card at age 18 (the youngest you are allowed to) just to get your credit started, even if you barely use the card. I say barely because if you never use it, it’s possible the issuing bank will close the card if they view it as an inactive account. So, it's smart to get your first card earlier and keep it open for a long time. It's also okay to close that card at some point, if for example, your second oldest card is only a few years younger than your first card. While early on each card will impact your score a lot, 15 years down the road, how much of a difference will it make if your oldest card is 15 years old or if you closed that card at some point and now your oldest card is only 13 years old?
• How long have you had your newest line of credit for? You want your newest line to be old so that it looks like you aren't asking for new credit very often, but in the miles game, your newest credit will likely always be no more than just a few months old. ;)
• What’s the average age of all your accounts? Also, a simple formula. Add up how long you’ve had each card, auto loan, student loan, etc. open for and then divide by the amount of accounts you have. Now, opening new cards will lower this average, as you'll have more cards that are not very old, but the average is just one part of this whole section that's only worth 15% of your score, and with time, these cards will get older and actually improve your average.

• New Credit
• “New Credit” means how many cards/loans you have opened up recently (of course it’s uncertain what “recently” means and how it calculates into your score) and – get ready for the second largest myth debunking of your credit knowledge – how many inquiries (aka pulls, hits) into your credit you’ve had recently. What’s the big mythbuster? It’s only 10% of your credit score!! Applying for a credit card may indeed come along with an inquiry, but it’s only 1 inquiry in a category that only totals up to a whopping 10% of your score! Opening (even applying and getting rejected for) cards does not hurt your credit nearly as much as people think it does. To make things even better, we’ll learn in a future post how to apply for 4 cards at once and only get 1 pull on your credit report!
• I would like to add an important point to this section. Even though inquiries don't affect your score that much, when a bank reviews your actual report and sees the inquiries, it may take some work explaining why you've applied for so much credit. It may be easier to explain your credit card needs to a credit card company than to a mortgage broker. Since inquiries stay on your report for 24 months (but are only negatively calculated into your actual score for the first 12 months), I would not suggest getting too involved in collecting miles if you plan on applying for a mortgage in the near future. Play it smart. (At the same time, I've heard a report that someone applying for a mortgage refinance was honest with the broker and said he applied for all those cards so he could hit the big bonuses and collect miles – and was approved. So, I guess you never know.) From my experience, when a bank is considering a pending cc application, they look back at your inquiries from the past 3-6 months when deciding if you've had "too many" inquiries into your credit recently to issue you a new card. Of course, that should not dissuade you. As we'll say many times here, HUCA - Hang Up and Call Again - a term, and successful experience, I learned on DDF. You may just find a rep that doesn't think you've had "too many" inquiries recently and approve you for the card, even if it means calling 10 times.

• Types of Credit
• It is better (i.e. you’ll get more of the 10% of this category) if you have a lot of different types of credit, which are:
• Credit cards (a.k.a. revolving credit)
• Retail store cards
• Student/Auto loans (a.k.a. installment loans)
• Mortgage loans
• The second aspect of this category is the total amount of accounts you have. So does that mean having too many is a problem? Here’s a quote from FICO’s website that sums up the vagueness of really the whole system, “How many is too many will vary depending on your overall credit picture.” Gee, thanks. Even with ~20 accounts on my credit report, my score is 790+, so as this category is also just 10% of your score, I wouldn’t worry too much about how many accounts you have.

Hopefully all this information will help you understand at least the basics of your credit report and score in preparation for getting more involved with credit cards!