Credit Scores Fully Explained (Plus ONE Common Misconception)

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Credit scores explained including how credit scores are calculated, the 5 types and one common misconception.

One of the most common misconceptions about credit scores is that applying for credit cards ruins your credit. Personally I have over 20 credit cards. When I talk to people about this, first question I always get is like doesn't that ruin your credit your credit score? The reality is exactly the opposite. My credit score is nearly perfect and it's in the top percentile.

FULL DISCLOSURE: Through One Mile at a Time we do receive commissions from some banks if you're approved for a credit card. We always try to give honest advice here and of course you don't have to use our links but if you do we do appreciate the support.

There are 5 main factors that go in to your credit score.

- 35% of your credit score is your payment history
- 30% of your credit score is your credit utilization
- 15% of your credit score is your credit age
- 10 % of your credit score is the types of credit you use and
- 10% of your credit score is your requests for new credit

Let’s talk about how having different cards impacts that and also about how applying for cards. The bad news which is that roughly 10% of your credit score is made up of your credit increase, which is your request for new credit. This means that when you apply for a credit card you can expect that your score may go down temporarily by about 2 points or so. The good news is that virtually the rest of your credit score will go up the more cards you have as counterintuitive as that may sound.

The single biggest thing that goes into your credit score is your payment history. That is 35% of your score and what this means is that if you make your payments on time that's over a third of your credit right there. That’s perfect if anything actually having more cards helps you because you can demonstrate more often that you can use credit responsibly when you're making your payments on time so by having more cards you're showing a better payment history.

The second biggest factor in to your credit score is your credit utilization and that makes up about 30% of your credit. This is the area that is most positively impacted by having a lot of credit cards.

Typically I recommend don't use more than 30 to 40% of your credit. What that means is let's say you have a credit card and it has a $10,000 credit line if you spend $9,000 on that card every month you're using 90% of your credit. To banks this seems really high-risk because they're worried okay is this person using almost all of their credit if we extend them more credit will they be able to pay it back.

The next biggest factor in your credit score is the average age of accounts. What credit card issuers want to see is that you're using cards long term and so this is where it makes sense to have a balanced strategy. I have a lot of credit cards some of them are new and some of them are old so what I do is I get some no annual fee cards that I hold on to long term that I've had for over a decade. The reason I have them for that long is because it makes my average age of accounts older. The longer you show your responsibly using your credit ,the better in a position you're in the
higher your score will be.
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About Ben Schlappig:

Lucky has been a travel blogger for over a decade and has flown over 4 million miles, visited more than fifty countries on six continents and has spent thousands of nights in hotels. He’s been chronicling his thoughts One Mile at a Time since early 2008.

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