this post was submitted on 22 Apr 2024
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How does that credit score work at all?
Not an american and we don't have a credit points system like them so interested.
Yogthos answer is great, To add more context, and be a bit more negative... the credit score effectively incentivises spending a lot of money and taking out a lot of loans, and by taking out a lot of money and by paying them off, you get better credit, which means only the people who can take on big loans and pay them off get better credit. Basically only rich people have good credit, which means basically only rich people can buy houses and cars and things like that. It perpetuates a cycle for the rich getting richer and the poor staying poor.
Remember, in America, houses are an investment. You can use them to collect rent and, in general, line should go up, so your investment will gain in value over time on average.
This isn’t entirely true. A large part of a credit score is the age of revolving credit accounts. So you can get a very high score but just having a credit card with a $200 a month limit and paying it off each month on time. By year 2 your score should be very strong.
Or take out a higher limit card and just pay all your bills with it.
You don’t need massive loans or multiple accounts.
Ehhhhh, kinda.
Some credit card companies make their information more public.
Almost all across the board take on-time payment history as their largest contributing factor of the credit score, 35% according to my report. This means that any missed payments on anything will dramatically reduce your credit score. These hits on your score last, I believe, five years.
Next, at 30%, is only utilizing a small amount of your total credit. Now in such a case, you can get a very low amount of credit and use very little of it. This is fine. But if you're going to use your credit card for actual things, which takes advantage of getting points and bonuses and yada yada, then you need a lot of credit. As someone with a $15,000 limit on one credit card, I am able to keep my credit usage by percentage very low.
Next, add only 15% of your credit score, which is still big, but not as big as the others, is credit age. 0-2 years is only the starting place. Your credit age is average between three and seven years and it only becomes good when it's over seven years. You can only achieve an excellent in this category with 25 or more years of continuous credit usage. This is by far the absolute hardest part of your credit score to increase. The best way to have a good credit score at a young age like in your 20s is if your parents opened one with you and put you on their good credit score when you were in your teens. This can be very dangerous for people who don't have enough money to pay off their card every month and can spiral you into debt really fast.
Having $50,000 or more in credit limit is optimal for the highest credit scores. Considering they do income checks when you apply for a credit card, you absolutely will not have a high credit limit on any one card unless you make a lot of money.
Next and the smallest amount of effect on your credit score is new accounts and recent inquieries. This means you can't go get a bunch of new credit cards all at once, or else your credit score will tank. And if you buy two cars and a house in one year, you should wait a good three years before applying for anything else, less you hit your credit score.
Sorry for the brain dump. I had experience with this as a liberal and learned a lot about it. Just the high credit limit, old credit age, and low utilization requirements, means that basically anybody who is poor is going to have a hard time getting high credit.
Mistakes at least do go off your credit history. I actually had defaulted on a loan when I was younger and really fucked things up and my credit score was garbage. But now it is routinely over 800 when I check it, and it's been over 850 when companies have checked it. I got my morgage at 2.4%... Good credit is cheap to maintain once you have some money... But not impossible if you have less. Just really hard.
Basically there's some opaque formula companies use to figure out your score based on how often you use your credit cars/take out loans, how regularly you repay them, etc. This in turn affects your ability to get loans. Like if you want to buy a house or a car, they'll check your credit score, and if it's not high enough then they won't float you, etc.