What’s a Credit a Score and How Can it Help Me?
Confused by credit reports, scores and what makes them either good or bad? Think of your credit report as the complete history of your financial life thus far. It contains all the highs and lows of your financial decisions and is representative of your money management journey. Now, think of your credit score as the grade of your credit report. Both are incredibly important, but let’s dive a little deeper in your credit score.
What is a credit score?
A credit score is the 3-digit numerical grade that represents the history of your credit report. The higher the number, the better your credit score. There are two major credit scoring models, FICO and VantageScore. These models differ slightly, so you may have two different credit scores, although they should be similar and in the same range.
The credit score range by FICO looks like this:
- Poor 300-579
- Fair 580-669
- Good 670-739
- Very Good 740-799
- Excellent 800-850
Keep in mind that what one lender may think of as a “good” score may be “fair” to another lender. You can get free credit checks many places including Experian.com, transunion.com, freescoreonline.com and creditkarma.com. If you check your credit score often, you’ll always know which range you fall into, giving you confidence and considerable consumer power.
How is my credit score determined?
When it comes to the actual scoring of your credit, there are a few important factors that account for different percentages of your score.
- 35% – Payment history This is the most important factor. If a bill is 30 days past due, you can be penalized with a fee and up to 100 points off your credit score. That will stay on your credit report for seven years!
- 30% – Credit utilization This refers to how high your balance is in relation to the limit on that particular line of credit. You’re safe keeping balances under 30% of your limits but under 3% is ideal.
- 15% – Credit history This is the average age of all of your credit accounts. When you open new accounts, your credit score may fall slightly because the average age will change.
- 10% – Credit diversity These are the different types of credit accounts you have (credit cards, student loans, auto loans, etc.). Having credit diversity can build up your credit by showing lenders that you’re financially responsible and can handle different kinds of accounts.
- 10% – Credit Inquiries This happens when a lender runs a credit application (with your approval) and checks your credit history and score.
Pro Tip: By setting your bills to autopay, you’ll be helping your credit score increase.
Why is your score important?
A credit score in good standing will never go out of style. When you apply for loans or other types of credit, lenders will see your high score and know that you’re a safer bet than someone with a lower score. Having a high score takes patience (building credit history), consistency (always paying on time) and constraint (don’t open accounts that you don’t need). These three things alone will enhance your credit score over time. Also, a high credit score can save you money by being eligible for lower interest rates on different credit products (auto loans, credit cards, mortgages).
What can I do to raise my score?
Your everyday spending habits will be represented in your credit history and your credit score. Keep these in mind whenever you’re making a purchase or thinking about making a purchase:
- Always pay your bills on time
- Pay credit card balances in full each month or ASAP
- Practice keeping low credit utilization
- Stay out of debt by paying more than minimum balances and by spending within your means
- Apply for lines of credit only when necessary
Having a credit history is not a bad thing—it can actually work in your favor. It’s all about your spending habits and how you approach money management. A good credit score can set you up for financial success, get you approval on a loan or mortgage request, and help you save money on future purchases.