A survey from NerdWallet and Harris Poll found that many Americans do not know the rules of credit scoring. Here are some of the findings:
- About half of Americans don’t know that having bad credit can limit their option for cell phone service, and more than half don’t know that people with poor credit will pay higher utility rates.
- Almost one-quarter of Americans in the survey didn’t know that they might be unable to rent an apartment due to poor credit.
- Nearly 45 percent didn’t know that they might pay higher car insurance premiums if their credit scores are low.
- About 41 percent erroneously think that carrying a small balance on credit cards will hurt their credit scores.
Knowing the rules of credit-scoring is important because having bad credit is expensive. You will pay higher interest rates on your credit cards and loans, as well as higher premiums on insurance, and higher deposits for utilities.
Here are the basics of credit-scoring. FICO scores are calculated from data reported to credit bureaus by lenders. This information includes:
- Your payment history accounts for 35 percent of your credit score. If you are 30 days or more late on a payment, your score could drop.
- The amount of credit you use accounts for 30 percent of your score. You will have a higher credit score if your credit card balances never exceed 30 percent of your credit limit. And, as your loans age, your score will increase, assuming you pay your loans on time.
- The age of your accounts determines about 15 percent of your score. The older your accounts, the deeper your roots, and the better your score.
- Having a healthy mix of credit accounts for about 10 percent of your score. Creditors want to see that you can juggle different types of credit, so they assign better scores to people who have, at a minimum, three credit cards and an installment loan or credit rebuilder loan.
- Credit inquiries account for 10 percent of your score. Unless you are rate shopping, your score will drop a few points every time you apply for a credit card or a loan.