I Made a video back in 2019 breaking down the five categories that make up your credit score and today I Want to break down not only how that has changed, but also what you need to be doing to ensure you have the highest credit score possible. So let's go over how credit scores are calculated and how exactly the credit score algorithm works. Hello everyone, and welcome back to your new video! Sean's name And today we're talking about one of the most important aspects of the financial world that we live in today: Credit. And look I Know credit scores can be painstakingly boring and frustrating, but with proper care, it could save you thousands and hundreds of thousands of dollars when you go to borrow money.

Seriously, spending 10 extra minutes a month on your credit score can be one of the best investments you ever make. And look I see it every single day doing mortgages Okay. Whether someone's coming to me to purchase a home or to refinance a home, the difference between someone with a 600 FICO credit score and the difference between someone with a 700 FICO credit score is drastic. The bottom line: Credit is very important.

and the crazy thing is the video I made back in 2019 breaking down those categories are almost identical to how the credit score algorithm works today, which means it's predictable. But the biggest change between back then and today is that back then, your credit score was determined more heavily on this specific point in time, how you were spending, and what your spending habits were. today. nowadays, credit scores are more heavily weighted on what's called trended data, which means it's not only how your score and how your spending habits are today, but how it's been over the last 12 to 36 months now, back in 2019.

It did matter about your credit history, but nowadays it's much, much more important and I'll dive into that change in just a little bit more depth through each category as you work through them, but there are some other minor changes throughout the credit algorithms. Let's break it down okay. the most important part of your credit score nowadays, and how honestly it's always been, is payment history. Payment history makes up 35 of how your score is calculated just by making your payments on time.

Without any late payments, your score will be rewarded very heavily. I Think this is absolutely incredible because as long as you're doing the bare minimum, your score is off to a very healthy star making up majority of the pot. Now some people will say this is a double-edged sword though, because when you miss one payment, you have one late payment on your credit report. it is going to be a drastic change in your overall credit score because of how much of the pie this makes up.

Look, you have to think of your credit score like dating someone, right? You could have a phenomenal relationship for three years and just everything's going great. and then all of a sudden you cheat on your girlfriend with that Tick Tock Model and Boom. Trust is immediately gone. That's exactly how it works with creditors.

It takes a lot of time to build up that trust and when you make one mistake, all of that trust is then gone. So it takes just as much time to rebuild that trust to get your score back to where it needs to be. Now, don't freak out if you have a late payment. You think your world's over.

Don't worry I Have a video linked down below. Go check it out on how to remove late payments on your credit report. It will help you tremendously, right? That's the biggest chunk of the pie. Now the second biggest chunk of the pie is the amounts owed in relation into your limits.

This makes up thirty percent of your score, and this hasn't changed one bit compared to how credit scores were calculated in the past. This is also known as credit utilization. That's what I tell all of my clients and all of my subscribers on this channel, which is actually a good reason if you hit that subscribe button right now. But if you want some quick boost to your overall credit score, pay down those credit card balances.

Get that credit utilization under about 30 percent of what the card's total limit is, and you're gonna see some drastic improvements in your overall score. And the cool thing with credit utilization is that this makes up 30 of your overall credit score. And the golden rule of thumb is to keep your credit cards no more than thirty percent of their overall limits. So I Just remember thirty percent and you're good to go and real quick.

Because a lot of my clients asked me this, they always say sure, why does that actually get you a better credit score If a creditor has said hey, Sean you can spend up to a thousand dollars on this card, why is your credit score improved when you're only spending three hundred dollars And the reason for that is because creditors want to see Financial constraint They want to see that you have the ability to spend way more and you choose to live below your means because that's a more comfortable and conservative approach. The kicker with credit card utilization is that most people actually don't know what their credit card limits are. So that's step one. Don't figure out your credit card limits and then no I can't spend more than 30 of that.

All right, let's work into some of the smaller categories on the Pi. Okay, next up is length of credit history and this is something that has changed recently. So this makes up 15 of your credit score. And it's how long you have certain accounts.

You know, for example, having one credit card for seven years or having another car for one year and then canceling that one and getting another one for one year and then canceling that one and another another one and another one. Which honestly, I see way too much of people need to stop doing that. Creditors really want to see that when you open up a new line of credit or a new loan that you're gonna actually stick with it and be committed to that loan for a period of time. Not that you're just getting that loan for something quick and then immediately paying it off again.

you got to think of it like a relationship. The more committed you are to your finances, the better off your score is gonna be. And this has changed in recent years because of things like a firm or these buy now pay later accounts where you open up a loan that's a six month term or seven month term and you pay it off over a couple payments. You know that's great that you're paying them on time and you've got that history.

However, it's such a short period of time at which you have that loan. so a new creditor is going to look at that and go. You know I Just don't think they're going to be in this for very long. They're looking for some short-term financing or some short-term borrowing and that's going to negatively impact your score.

So while the percentage of how much it makes up your credit score hasn't changed from my previous video, it has changed on how that's actually taken into account in terms of these shorter term or what's called micro loans. And it's kind of a bummer because it's really starting to negatively impact people when those types of micro loans are very popular amongst e-commerce sites. That means if you have to do a buy now Pay Later program when making a purchase, use it very sparingly. don't just use it because you have the ability to and then to piggyback off that.

The next category is the frequency of new credit which makes up ten percent of your score. This is essentially how often in your opening new credit or seeking out new credit. So if you're opening those buy Now Pay Later accounts you know, three to four times a year then it's a negative double whammy. Also, have to be careful with this one when opening new credit cards, right? You see these promotions all the time at our favorite retailers Home Depot Victoria's Secret All these things right? They say hey, we're gonna give you a 50 gift card if you open up a credit card with us people.

Open that credit card. They get their 50 gift card and they never use that credit card and they end up canceling it. Trust me, that 50 gift card or a hundred dollar gift card you get for opening a credit card is going to negatively impact you later down the line when you don't use that card and it's gonna cost you far more than 50 to 100 because of the higher interest rate you're gonna get when borrowing money because of your lower credit score. The Average: American only needs to have two to three credit cards Max That's all you need.

Have some constraints. Don't go open up tons of credit cards because I promise you you don't need it. But then lastly, the only remaining piece of the pie is the types of credit used which makes up the last 10 percent. Drivers want to say that you don't just have credit cards or that you don't just have car loans.

They want to see that you have a diversified credit profile. You have the financial IQ To know how to pay for credit cards. You know how to pay for loans. You know how to pay for mortgages.

They want to see this Diversified breakdown and at this point because I have seen thousands and thousands of credit reports from average Americans I'll tell you the absolute sweet spot that I've seen across all these credit profiles are typically two to three credit cards or two to three revolving lines of credit and then typically one to two long-term installment loans. These are things like a mortgage or an auto loan. That type of makeup shows just enough diversification to not over leverage yourself or to come off as a negative borrower. And Bam there's your fully broken down credit profile.

In terms of the pie that makes up your credit score. Just by knowing the credit algorithm and what makes up your score. you're going to be leagues ahead of the rest and that's really the important part when it comes across. Read it because it's not that if you do x y z you get X y Z score.

It's how you rank in comparison to the guy next to you. So there's only a certain percentage amount of people who have 800s and above certain amount of people who have a 700 to 800, 600, 700, 500 to 600, right? It's about the percentage of people, not what you need to get there. So it's all about getting ahead of the guy next to you. which is why it's super important to know how the credit algorithm is broken down.

so spend 10 minutes each month mastering your credit and I guarantee you're gonna thank me late. But ultimately I Hope you learned something new I Hope you enjoyed the video. If you did, please hit that like button on this video. please subscribe for more content like this when you guys support the channel.

It motivates me to do more content like this and to ultimately bring more value to you guys. And I appreciate way more than you know. Don't forget to check the links in the description for those videos that I mentioned. Otherwise, drop me a comment down below and I will see you in the next one.

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