Once you get above a certain age, you start hearing about a magical thing called a credit score. You hear that everybody has one and that you need to do everything you can to bolster it. You hear that there are things you can do to hurt your credit score and that once you’ve messed up your credit score it will take a long time for it to recover. Unfortunately, amidst all of these vague references and warnings, there are very few real explanations of what a credit score actually is and what it has to do with your life. Let’s take a look at the basics so that you’ll have a better understanding going forward. 1. Your Credit Report and Your Credit Score are Similar, but Not the Same Your credit score is a single number that is a reflection of all of the factors contained in your credit report. Think of it like when you were in school: your final grade in a class may have been a B+, but your teacher had a file that reflected attendance, your scores on quizzes, tests and book reports, your class participation and any extra credit you may have done. Your credit score is like your grade, and your credit report is like that list of inputs that the teacher recorded throughout the semester. While your credit report details all of the credit cards you hold and how quickly or slowly you pay those and your other debt accounts how many applications for loans or credit cards you completed, as well as any bankruptcies, judgements or liens against you, your credit score is a calculation whose inputs weigh all of those factors. All of the recording and calculations are done by three credit bureaus, and each positive or negative input (such as paying your bills on time or, conversely, paying them late) will make your score go up or down. 2. The Five Core Factors That Determine Your Credit Score If you want to have a solid credit score, it helps to know the five financial actions that impact it. They are: How quickly or slowly you pay your bills. This is referred to as your payment history, and it represents 35% of your credit score. Pay your bills off each month and your credit score will be higher, but pay late each month and it will work against you. You know how your monthly credit card bills display the amount that you owe as well as the amount of credit that you have remaining? This is a reflection of your credit utilization for that individual card. Thirty percent of your credit score is determined by how much of your available credit you are actually using, with 30% or less considered optimal. Keep in mind that this doesn’t mean that each card has to be below 30% utilization for you to have a good credit score. The credit utilization portion of your credit score reflects your total usage of your total available credit. Have you had the same credit card or cards for as long as you can remember, or are you constantly trading in old cards for new ones? Keep in mind that 15% of your credit score reflects the average age of your credit accounts, and the older they are, the better your score will be. The credit bureaus view long-term history with an individual credit institution as a reflection of financial responsibility. If you want to leverage this particular factor but are also attracted by the benefits or points offered by a new credit card, do so but don’t close your old account. Just hold onto it. You don’t have to use the card to get this particular benefit from it. You may try to keep your debts to a minimum, but the credit bureaus actually like to see that you have a variety of types of accounts and loans. They view it as a signal that you can manage your debt. This element contributes 10% to your credit score. Every time you apply for a car loan, a mortgage or even just a retail store’s credit card, the credit bureaus see what is referred to as a hard pull – this is viewed by the credit bureau as someone trying to determine whether you are worthy of their trust in applying credit to you. When the credit bureaus see multiple inquiries, they view it as a negative, because applying for a bunch of lines of credit within a short period of time can be seen as an indication that you are unable to pay your bills, or that you are vulnerable to getting into too much debt for you to handle. Though this only has a 10% impact on your score, it is something for you to keep in mind when considering taking out new lines of credit. 3. Accessing Your Credit Report and Scores Doesn’t Cost A Penny There was once a time when it was difficult to get a copy of your credit score or credit report – in fact, people used to believe that if you made that inquiry, it would work against your credit score. Today it is much easier to request a copy of your annual credit report from any of the three major credit bureaus, and you can access that information free of charge once every four months. There are three different credit bureaus - Equifax, Experian and TransUnion – and if you rotate between the three of them for a full year worth of reports. The advantage of doing this is that if you regularly check the information in your credit report, you will have time to spot any mistakes or inaccuracies and get them corrected before they have an adverse impact on your credit score.