Some people have been misinformed that good credit equals financial independence. It doesn't. Those are two different things but having good credit can help you get to financial independence faster because bad credit causes you to pay more in interest (especially if you want to get a mortgage to buy a house) which takes away from your disposable income.
There are several (49) different credit scores but we are going to focus on the breakdown of your FICO score. FICO stands for Fair Isaacs Corporation and they created the algorithm used to create your FICO score. Your FICO score ranges from 350 to 850, with 850 being a perfect score.
Your credit score is computed using five factors, payment history, credit utilization, length of credit history, credit mix, and new credit.
Payment History- 35%
The largest factor in your credit score in determining your credit score is your payment history. Have you been at making payments on time? For how long?
Amount owed (Credit Utilization) - 30%
The amount of debt you owe compared to your credit limit (or original balance) is also a big factor in your score. Having a high utilization can cause your credit score to drop. You should try to keep your utilization under 30%.
Length of Credit History 15%
Lenders look at when you opened your first account to determine how you handle credit over a long period of time. Your credit report shows the oldest account opened and when the most recent account was opened. Your report also shows your most recent credit activity. The longer your credit history the better by you also want your credit history to be positive.
Credit Mix 10%
Lenders want to see that you have a mix of credit types. The different types of credit are revolving credit (credit cards), installment accounts (student loans, car loans), and open accounts (cell phone accounts and utilities). There is not a formula to having the right mix of accounts and since your credit mix is only 10% of your score, so I wouldn't focus on it as much as payment History and credit utilization but a mixture of both is better than just having one type of credit.
New Credit 10%
Lenders want to know if you are opening a lot of new credit accounts in a short time period. opening a lot of credit accounts in a short period of time is view as risky and lenders are not sure if you will be able to repay your debt.
If you want to check your FICO score, it is available at myfico.com. If you have a major credit card most companies provided you with your free credit score monthly. You can also check your credit score for free on Credit Karma, Mint, and Credit Sesame. One thing to keep in mind is the score provided on these sites are not your FICO score, but they are close enough to give an idea of where you stand. From my experience, my FICO score was higher than the score shown on the Credit Karma, Mint and Credit Sesame, but I still use them to monitor my credit score on a monthly basis.
When is the last time you checked your credit score?
