How to play the credit score ‘game’

If you’ve tried to borrow money from a bank or other lending institution, it’s likely that your specific credit score came into play — specifically your FICO score.

FICO stands for “Fair Isaac Corporation” and is one of the most recognizable scoring companies. To make it more complicated, FICO has close to 50 versions of your score that can be used by lenders to qualify you for a loan.

Understanding Your Credit Score

A FICO score can range from 300 to 850, with most people falling somewhere in the middle of this range. Lenders will typically classify your scores into the following categories:

• 800-850 = Exceptional

• 740-799 = Very Good

• 670-739 = Good

• 580-669 = Fair

Different industries will use various scoring models to qualify you for a loan. For example, the scoring model used to qualify for a mortgage loan will likely differ from the scoring model used to qualify you for a credit card or auto loan.

If you monitor your credit score on a financial institution’s website, or on a site such as Credit Karma, you might notice that the credit score they use is different from what a lender pulls — even though it’s a FICO score. This is where the versions of your score come into play, as each version has differing algorithms that are used to make up your credit score.

That said, there are five main factors that are used to determine your score. No matter the scoring model, adhering to these tips will help you increase your credit score — resulting in better loan terms and interest rates.

What Affects Your Credit Scores?

Revolving utilization: 30% of your credit score is determined by the amounts owned on your revolving debt. An example of revolving debt is a line of credit or a credit card (more on different credit types later.) This aspect of a credit score has the most confusion surrounding it and is the topic I counsel clients on more frequently. The amount owed in comparison to your specific credit limit is called your revolving utilization.

Let’s say you’re working on building up your credit. You have one credit card with a $500 limit. You charge everything for the month: Gas, groceries, a weekend trip and suddenly — your balance is $497 for the month. You plan to pay it in full so you don’t get charged interest for the month.

You think you’re being smart by avoiding interest, building up your credit and collecting “points” or cash back for your spending.

A win-win? Nope. Unfortunately, charging more than 30% of your credit limit (even if you pay it in full at the end of the month), can bring your credit score down drastically. The amount you owe on your credit card compared to your credit limit is almost as important as making payments on time.

My recommendation is to never charge more than 20% of your limit each month. This way, you’re giving yourself a little wiggle room and staying well under the 30% mark. From a credit scoring standpoint, paying your balance in full each month vs. making the minimum payment has very little impact on your overall score. Of course, paying your balance in full is a better financial move overall, as interest charges on credit card debt can be hefty. Just note that doesn’t typically play into your overall score.

Payment history: Your payment history makes up 35% of your credit score. Making on-time payments can increase your score, whereas — you guessed it — missing payments can result in a negative impact.

Typically, late payments are not reported to the credit bureaus until after the 30th day — even though you might have a late fee charged prior to that. The length of time you are late has a direct correlation to how much your credit score is impacted. A 30-day late, while impactful, won’t affect your score as much as a 60, 90 or even 120-day late would.

Credit mix or types of accounts: The types of credit accounts you have (also called “credit mix”) make up about 10% of your score.

The main types of credit accounts are installment accounts (such as a car loans, personal loans, or mortgages) and revolving accounts (such as credit cards or lines of credit.)

Revolving lines have a “revolving” balance, that can go up as you use them and down as you pay them each month. Installment loan balances only go down as they’re paid, you cannot go back and charge more on these without opening new accounts.

Length of credit history: This category makes up 15% of your score. It considers the length of time your credit accounts have been established. The longer your accounts are open, the better your score.

Tip: Don’t close older credit card accounts. Closing a credit card you opened back in college, for example, can bring your score down — as it removes that history from your credit report. It also reduces the amount of revolving credit you have open. The best bet? Leave the card open but with a $0 balance.

New credit: New credit accounts and inquiries make up 10% of your credit score. If you open a bunch of new credit accounts within a short timeframe to “build” credit, it can have the opposite effect.

Tip: When shopping for a mortgage, you are able to have your credit checked multiple times by lenders within the same industry and it only counts as one inquiry with the bureaus. The caveat? It must be within roughly a three-week time period.

Each inquiry will show up, but it won’t impact your score with each hit. This provides the benefit of shopping multiple lenders for rates and products. The bureaus aren’t extremely forthcoming on the timeline in which this applies, so to be safe I tell people to keep the inquiries lumped together within a two-week period.

Remember, it takes time to build an exceptional credit score. It doesn’t happen overnight. If you stick to these tips, you should become a master of the credit score “game.” Having very good or exceptional credit will result in lower interest rates and better credit terms being offered.