Kylie Saigol, an analyst with the Rising Gen client segment team, spoke with Wendy Mock, host of UBS Trending, about building sound credit ratings. The Rising Gen client segment team assists investors under 40 or those at the beginning of their financial journey. Click here to watch the episode, which aired May 18, 2022.
What goes into a credit score?
There are a number of components that make up your credit score, but some are more important than others:
— The first is your payment history. This is the most important because it indicates how well you are able to make future payments. Credit card companies will automatically report payments or non-payments to the bureaus. That means paying your credit card and other bills on time is the most important way to make sure you’re on the right track. Personally, I’ve found it easier to set up automatic payments for my bills and credit cards, even rent, so I don’t miss deadlines – just make sure there’s money on your account to cover payments.
Your credit score also takes into account 4 other elements. The next highest amount is the amount you owe in repayment against the available line of credit you have. For example, if you have a $10,000 line of credit, you wouldn’t want to owe more than $3,000. The amount you owe against your overall line of credit is known as the debt to credit ratio and general advice is to avoid using more than 30% of your credit limit if possible to avoid damaging your credit score.
The other elements taken into account are:
— The length of your credit history. The more the better.
— New credit applications: If you try to open too many credit accounts in a short time, it could hurt your score. (More on that below.)
— Credit mix: The variety of loans you have. These can include revolving loans, like credit cards, or installment loans like home loans, auto loans, or student debt. According to Experian, credit makeup accounts for 10% of a person’s FICO credit score. Maintaining a credit mix demonstrates that you can handle multiple types of loans and can increase your score.
– Major overriding items such as tax liens, judgments, bankruptcy, charges/recoveries are also factored into your score.
What are the pitfalls to avoid ?
People often think that the more credit cards you have, the easier it will be to build up credit – so they ask for many cards. However, asking for credit cards unnecessarily can work against you. A firm credit inquiry, or credit check, is when a potential creditor is legally permitted to view your credit report to assess whether and at what rate they will extend you credit. A serious inquiry is recorded on your credit report, and each serious inquiry for a credit card could lower your credit score by up to five points, according to FICO. A serious investigation usually falls out of your report after about two years. (Note that there is a difference between a soft inquiry and a serious inquiry. An informal inquiry usually occurs when a person or company checks your credit as part of a background check or when you look at your own file. credit checks. Informal inquiries do not hurt your score). The best way to apply for a new credit card is to do your research beforehand and understand your likelihood of being approved for a card before applying.
You will also want to consider the implications of closing a credit card. Sometimes that’s the right choice, like if you’re struggling to spend too much or even want to switch cards for another reason. When you close a card, you may temporarily see a drop in your score, as this could change the average length of credit history, and you reduce your available credit limit overall, which means you will have impression of using a higher proportion. of any credit granted to you. It is therefore better to weigh the pros and cons of closing it or leaving it open and not using it.
Click here to watch the full video, which includes more commentary on how to build and maintain your credit score.
UBS offers many resources to help you stay financially fit. Visit ubs.com/TheCode. The free site offers interactive educational modules to help you understand the fundamentals of money management or how to contact a financial advisor.