What Is Credit Score?
A credit score is an ever changing number assigned to you as an individual which ranges from 300 on the low end to 850 on the high end. It reflects how trustworthy you as an individual are in the eyes of possible lenders such as banks or mortgage companies to car dealerships and more. The three common credit bureaus are Experian, Equifax, and TransUnion. You will have an individual credit score from each of the three agencies. Some lenders may only look at the score from one bureau while others may use information from two or all three. Your credit score has specific labels that correlate to specific ranges:
Poor: 300-579
Fair: 580-669
Good: 670-739
Very Good: 740-799
Excellent: 800-850
Factors That Affect a Credit Score
There are many individual factors that come together to make up one’s credit score. Some factors can easily be impacted by the individual's actions while others just take time. Each factor is also weighted differently in terms of direct impact to one’s credit score. Five common factors that affect one’s credit score are:
Length of Credit History (15%)
Payment History (35%)
Total Amounts Owed/Credit Utilization (30%)
New Credit/Hard Inquiries (10%)
Types of Credit (10%)
Length of credit history is a factor that takes time to build up. The earlier you start your credit history, the better because it factors in the average time of all your accounts. This reflects you as a borrower by showing how responsible or irresponsible you are over time and how risky it is to give you a loan or lend you a credit line.
Payment history is the largest factor that you have a direct hand in. This shows if you’ve been on time with paying off your debt. It is important to always keep track of what you owe, how much you owe, and by when because one or two missed/late payments can have a large negative impact on your score. So do not ever miss a payment if possible.
Credit utilization is the second largest factor in terms of affecting one’s credit score. This is calculated as how much debt you’ve incurred compared to how much available credit you have overall and is reflected as a percentage. For example, if my available credit is $1,000 and I’ve put $100 in charges on my credit card, my credit utilization for that billing cycle is 10%. A general rule of thumb is to keep your credit utilization under 30% while others suggest under 10% if you’re trying for the highest credit scores.
New credit looks at any recently opened accounts which also include hard inquiries. When you apply for a loan, credit card, mortgage, a hard inquiry is placed onto your credit profile. This means that the potential lender is looking at all the factors listed above to determine if they want to lend to you and if so, how much. You will generally get a hard inquiry on your credit report whether or not your loan or credit card gets approved. The lower the number of hard inquiries the better. Generally, hard inquiries fall off your credit report after two years.
Types of credit looks at the different types of debt you may have on your credit profile. Types of credit include student loans, auto loans, credit cards, mortgages, etc. If you have a diverse debt portfolio, a potential lender may see how successful or unsuccessful you are at managing your debts.
What Is a Good Score?
Generally, a good score to have is at least 700. Of course the goal should be to always strive for a higher credit score such as the 800 to 850 range.
Will a Higher Credit Score Help Me?
Yes. A higher credit score will open many more doors for you than if you had an okay or poor credit score. Many potential lenders use your credit score to determine your interest rates and payment amount. So having a better credit score may make you eligible for more attractive payment amounts and rates. The higher your credit score, the more likely you’ll be approved for a credit card or a loan and with a higher amount as well. If you want to collect credit card points and miles for travel, getting approved for cards is of the utmost importance.
What If I Don’t Have a Credit Score?
If you’re young, just starting out, or avoided credit cards you may not have incurred any debts such as student loans, mortgage, or car payments. Without a credit history, you won’t really be able to have a credit score. The best place to start is to look for a secured credit card at a reputable bank or credit union. These cards work by you paying a deposit as collateral to the bank and in turn they allow you a small credit limit. You will have to pay your secured credit card bill monthly like a normal credit card. Another method is becoming an authorized user on your parent’s (or someone similar) oldest credit card. This can even be a card that was opened before you were born in some cases. This will benefit you as long as the person adding you is responsible and pays on time.
How Do I Improve My Credit Score?
There are many ways to improve your credit score. First, you need to figure out what is causing your credit score to be low or what factors are keeping your score from moving up. You can find many free options to view your credit report online.
You need to pay your bills on time every month. This will be one of the biggest factors in terms of your credit score going up or down. If you have any late or miss payments, try to resolve them with your lender as soon as possible. You may be able to ask for any negative remarks to be taken off your credit report once the debt is resolved, which can help your score. If you have debts in collections, resolving these directly or through a lawyer may be in your best interest for the sake of your credit score.
Do not close your credit cards! You may think that closing credit cards that you don’t use may be helpful in terms of your credit score. However, it is not in your best interest to do so if you care about a good or even excellent credit score. Closing your unused or old credit cards will directly impact your credit history and your credit utilization. It is generally in your best interest to keep your credit cards open by downgrading to a credit card with a low or no annual fee and using it once or twice a year to show that it is not inactive. Some credit card companies have been known to close accounts that show no activity.