Tom and John Mills' Common Cents: What's inside your credit score?

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I was at a car dealership when I discovered I was the victim of identity theft. I was hoping to leave with a new car; I left empty-handed after being told I had over 30 unpaid bills. It took more than 12 months to prove my innocence and fix my credit score.

Credit scores are assigned by three credit rating agencies: Equifax, Experian and Transunion. These agencies gather financial data on Americans so that when Americans apply for loans, creditors can verify that they are likely to pay it back.

Credit scores range from 300 to 850. Good credit is considered 740 and up. The lower your credit score, the higher interest payment lenders will require. If your credit is bad enough, you won’t be able to get a loan.

Having good credit is worth fighting for. The most frequent punishment for lousy credit is paying higher interest rates, but there is more. Having bad credit can affect insurance rates, employment opportunities, and access to certain financial products.

Various factors help create a credit score. The heart of the credit score comes from three areas: payment history, amounts owed, and length of credit history. These three factors make up about 80 percent of the credit score.

Payment history is pretty easy to understand. If you don’t make timely payments to your creditors, they will report the missed and late payments to the credit rating agencies. Payment history is the single-most significant factor for your credit score.

The second most significant factor is the amounts owed. If a credit rating agency sees that your debt levels are increasing to a point where your budget might be getting tight, they will lower your credit score. Even if you have a history of making timely payments, excessive debt makes you a higher risk. You are just one sickness or job loss away from missing a lot of payments.

The third-largest factor in your credit score is your length of history. If you are young and have not proven yourself to the agencies, you will have a lower rating. I have seen very wealthy individuals struggle to get small loans simply because they didn’t have a history of making payments.

Occasionally, I encourage young individuals to apply for a credit card to make a few payments and begin the process of creating history.

Two smaller factors in the credit score are credit mix and new credit. The credit mix is the various types of debt and payments you make. Having tons of credit card debt will hurt more than having the same amount in a home mortgage. The new credit factor has to do with your recent actions. If the agencies see that you are rapidly getting into further debt, they will lower your credit score.

People need to monitor their credit consistently. I highly recommend using the cellphone app/website, Credit Karma. I can check my credit for free as often as I need, and I get alerts when my score changes and when my credit gets checked.

Watch now: Crazy ways you can save money!

Tom and John Mills are registered investment advisers and certified financial planners. Reach them at 254-0155 or MillsWealth.com. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group (SWAG), a registered investment adviser.

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