yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

What can change your credit score? | Consumer credit | Financial Literacy | Khan Academy


4m read
·Nov 10, 2024

So let's talk a little bit about the things that impact credit scores. You might imagine the number one thing, and it indeed is the number one thing that impacts your credit score, is payment history. It is 35% of your credit score, so I'll put that in parenthesis: 35%. What is payment history? Well, when you owe people money, have you paid it back? Have you paid your loans back on time?

Now, the second most important thing or consideration in credit scores—and this one was a surprise to me when I first learned about it—was credit utilization. I actually had made some mistakes here early in my history. Credit utilization, which is 30% of your credit score, is the fraction of your available credit that you are actually using.

So, it looks good from a credit utilization point of view. Let's say that you have $10,000 of available credit, but you're only using—so let me put "have" there—but you are using, let's say, $100 of it or even zero of it; that looks pretty good.

Now, the mistake that I made is I thought, "Well, I'm just going to pay off all my bills, and if I don't need a certain credit card, I am just going to close those credit cards." Let's say that this $10,000 comes from two different credit cards. Let's say I shut one of them down. Well, then your credit availability might go down to say $5,000 because you say, "Hey, I only needed $100 of credit."

But this actually puts you in a worse situation because you're using the same amount, but what you could use—your available credit—is lower. So, if you want to make this credit utilization as good as possible, you actually do want to have credit cards or other sources of credit that you have access to, and then you just want to use them as little as possible. You don’t necessarily want to close those credit cards; you want to have that available credit but not necessarily utilize it.

Now, the next one—this might not be a surprise—is just the length of credit history. Remember, your credit score is a way of approximating how big of a risk it is to lend to you. So, length of history: the longer that they have data on you, and especially if it's good data, well, that's going to give people confidence that you are a good credit risk. So that's why it is taken into account. It's about 15%.

Now, the next one—and this one is a little bit less clear on what is the optimal mix—are types of credit. You might say, "What types of credit are there?" This is 10% of your credit score. Well, you could have mortgage loans, you could have credit cards, you could have car loans.

The general rule of thumb here is the more different types of credit, the more diversity you have here. That's, in general, a good thing. Last but not least, there is new credit. So if, in a very short amount of time, you are going out there and applying for a lot of new credit—not a lot of new loans, a lot of new credit cards—that can negatively impact your credit score.

Now, when you're going and trying to open up a new account or trying to get a new loan, and they look at your credit score, those are called hard inquiries where they're looking at your credit score to figure out if they want to loan to you. If you get a bunch of hard inquiries in a short amount of time, that can have a negative impact on your credit score.

Now, I want to be clear—not all credit inquiries are going to have a negative impact on your credit score. There is something else called soft inquiries. As you could imagine, soft inquiries are, say, part of a background check, and those do not have an impact on your credit score.

There are other things that sometimes people think have an impact on their credit score that don't. So first of all, soft inquiries—so you're not applying for a loan; someone's just trying to, let's say for employment, look at your credit score—that one has no impact on credit score.

Another thing that people are very surprised about is that—and let me scroll down here—so let me write "no impact." No impact includes soft inquiries, but it also includes your income. Some people have the misconception that if you make a lot of money, you're going to have a better credit score just because of that. No, it might be because you are better at paying some of your bills off, but income is not factored into credit score.

Similarly, employment is not. If you lose your job, your credit score does not, all of a sudden, go down, or if you get a job, it doesn't all of a sudden go up. And also things like credit counseling—just because you went to get counseling to help you with your credit, that does not have an impact on your credit score.

More Articles

View All
Do Aliens Exist?
Do you think there is life beyond the earth? >> Yes, I do. >> Why is that? >> Scientifically been proven? >> Are we alone? Or is there life elsewhere in the universe? This is a question humans have wondered about for millennia and …
Executive orders | US government and civics | Khan Academy
What we’re going to discuss in this video is executive orders, and these are directives being issued by the President of the United States that can have the force of law. I know what you’re thinking: isn’t Congress our legislative body, the body that actu…
Heritage | Vocabulary | Khan Academy
It’s time to explore our roots, wordsmiths, our backgrounds, where we came from, because the word I’m bringing you in this video is “heritage.” Mind you, we’re always exploring our roots when it comes to vocabulary, huh? All right, “heritage” is a noun. …
Origins of the Cold War
Hi Dr. Kuts. Hello David. How you doing? I’m doing well. I am excited to learn about this thing we call the Cold War. What is a Cold War, and what makes it different than a hot war? So a Cold War, and in this case, is it’s really, um, it might be a te…
The 5 Step Process for Getting What You Want From Life
Like I say, you can have practically anything you want in life, but you can’t have everything you want in life. So that means you have to prioritize what are the things you’re going after. That has to do with the earlier part of, you know, know what you’r…
The First Monotheistic Pharaoh | The Story of God
Amid the remains of dozens of pharaohs, Egyptologist Salma Ikram is going to help me find one whose name is Akhenaten. There he is! Yep, he thought that there were too many gods and not enough focus on him. There will need to be an important god whom onl…