There are a lot of people out there that have terrible credit, I know many students and professionals that have terrible credit and it is affecting their life in a big way. Not only do they run your credit when you buy a car or a house but they also run you credit when you want to rent a home or take out a loan. It is definitely in your best interest to get a better credit score and this post will go into the 5 categories of the FICO credit score that you need to know about to have better credit. Check out the video below from our YouTube channel Foundational Financial Knowledge and please SUBSCRIBE and check out our other videos and blog posts.

1. Payment history
2. Amount Owed
3. Length of credit history
4. New Credit
5. Types of credit used

Payment History-35%

Payment history is the largest category of the FICO credit score coming in at a grand total of 35%. So if you were going to focus on any one area this would be the area to focus. Most importantly with credit history is going to be making your payments on time. Of course this is the part that most people have a problem with they get a little behind and debt tend to snowball. If you are late once then you need to call your creditor and ask if they will remove that red flag from your record. If this isn't a habit then chances are good that you can get that taken care of with out to many problems. If you are late making payments more then once then you probably need a habit change to keep your priorities in line.

Amount Owed-30%

The important thing to keep in mind in this category is that it is still 30% of your credit score so controlling this is key. A good practice is only using only 10% of your credit limit so if you have a $1,000 limit on your card then aim to only use $100 at a time. The thought behind only using 10% is that in theory you should have an easier time paying that balance off and not get into as much debt in the first place. It is what will make the difference between a good and bad credit score.

Length of Credit History-15%

The length of your credit history makes up 15% of your score so the longer you keep a line of credit open the better it looks. If you have a credit card with a balance that you have been wanting to get rid of for a while when you finally pay it off many people want to close that account and get rid of it. However this can hurt your credit, instead pay that balance off but keep the credit card open because the longer you have it the better. Of course if you have impulse issues and you are going to get yourself into more debt then by all means you should probably get rid of the temptation. Otherwise if you have any self control do your best to keep that line of credit open to help you in this area of your credit score.

New Credit-10%

This section is 10% and is pretty simple basically it is a commendation to take out a new type of credit if you don't have very many lines of credit. For example your credit report may recommend having another credit card to show that you can handle more then one or two lines of credit. Don't go into more debt for this section, simply if there is a good reason for another credit card then don't necessarily hesitate from having a more then one line of credit at the same time. It doesn't mean you have to use that new card all the time.

Types of Credit Used-10%

This section only makes up 10% of your score but is still important. While counter-intuitive it can actually help you to open up more and various types of credit. For example having a mortgage, car loan, HELOC, and Credit card can look better then only having a credit card. Now I'm not advocating to stay in debt just to improve this section however having more lines of credit out shows that you are responsible and can handle having debt but only if you are paying that debt on time.

Other Considerations

Go ahead and check your credit report and see if there are any errors on it. Credit agencies do make mistakes so don't let your lack of checking harm your credit.

Also if you have a lot of debt making two payments a month can help out. This will stop the interest from accruing for the whole month and make it so that you are able to pay your loans down faster over time and pay less interest over the course of your loan.

Check out this calculator to see how much of a difference it can make:

Bi-weekly calculator

Another thing that can help you if you are in a large amount of credit card debt is find a new card that has a 0% introductory rate. Very often you can transfer your balance from one card to another for a small fee. So if you have an 18% interest rate on one card this may be an option to help you pay off your card in the mean time.

If you are shopping for a car or home loan shop for that loan quickly. To many credit pulls can hurt your credit. If you have your credit pulled multiple times within the same two week period it is better for your credit because it will show as one pull and not as multiple hits to your credit score.

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