Credit Scores 101

October 18, 2019

Do you know your credit score? As you get older, credit scores become more and more relevant. Why care about your credit score? It's an essential number to know because it can help you qualify for loans, get lower interest rates, purchase a car or home, get a credit card, rent an apartment, or even get a job.

Credit Scores 101-1

What is a credit score?

A credit score is a number assigned to a person that indicates to lenders their capacity to repay a loan.

 

Can I have more than one credit score?

You can have multiple different credit scores, such as FICO, TransUnion, and Equifax. Each serves the same purpose. These credit bureaus collect information that helps determine your creditworthiness. Sometimes, the credit score ranges will vary depending on the type, but they are all very close in number. There are five different ranges of credit scores. The low end of the scale are poor, and the high end is excellent. Here are the credit ranges for a FICO credit score:

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

 

What determines my credit score?

  • Payment history
    • Payment history is critical to your credit score, and even the slightest slip up can cause your credit to take a hit. This is because payment history contributes to around 35% of your score. A positive payment history shows lenders your ability to not only repay the debt, but also repay the debt on time. If you don't make a payment because you can't afford it, your credit score will begin to reflect that.
  • Total amount owed
    • Your total amount of credit owed is another significant contributor. That's why it's important to manage your total debt and know your credit utilization ratio. This is a ratio that adds up all your credit card balances and divides that amount by your total credit limit. The lower the number, the better.
  • Length of credit history
    • Credit history doesn’t contribute to your score as much as payment history, but it does still hold a significant number. The length of your credit history, also called your credit age, is going to make up about 15% of your credit score. This is because the longer the history, the more experienced you likely are with managing credit. The length of your credit history will typically be made up of three different things. First is how long your accounts have been open. Second, how long specific accounts have been open, such as a student loan. Lastly, how long it has been since a particular account has been used.
  • Types of credit
    • As strange as it may sound, the different types of credit you have can play a role in your score too. This can range anywhere from revolving, installment, and open credit. Revolving credit is the most common and means you can borrow freely, but with a credit limit. Installment credits refer to loans that have a fixed, regular occurring payment schedule. Lastly, open credits, are similar to revolving credit because you can borrow up to a maximum amount. However, the borrowed amount must be paid back in full each month. This type of credit is less likely to show up on a person’s credit score.
  • New credit
    • New credit is the type of credit that shows lenders and other professionals how many new accounts a person may have and how many accounts a person has recently applied for. This is an important part of your credit score because the more new accounts, the lower your account age. Even opening a new account after having long term credit can lower your score.

 

How can I boost my score?

  • Pay bills on time
    • Improve your credit score over time by making sure that you are repaying your bills on time and in full. This will show lenders how reliable you are. If you pay your bills on time for six months straight, you may see a change in your credit score.
  • Pay off debt and keep other balances low
    • As mentioned above, know your credit utilization ratio, this will help you to control your debt and keep your balances low. The lower your credit utilization ratio, the better. This will tell lenders that you haven’t maxed out your credit cards and know how to manage your credit.
  • Up your credit line
    • This means to increase the amount of credit that is available to you. It is also called a credit limit. If your credit card account is in good standing, you may be allowed to increase your amount. The higher your limit, the lower your utilization rate will be; that is, if you don’t max out your card.
  • Don’t close your unused accounts and loans
    • Keep your unused credit card accounts and loans open because if you close the account, it may increase your credit utilization ratio or decrease your credit age. Keep in mind that owing the same amount of money in a few accounts may lower your score.
  • Hold a variety of accounts
    • Having a variety of credit accounts is always a good idea. Having a mix of accounts can show lenders that you are not only responsible with your credit cards, but also with paying off personal loans, auto loans, or another type of loan. If you continue to pay off your credit as planned, this may show lenders that you are less of a risk because you're able to successfully manage the different accounts. 
  • Apply for new credit cards only as needed
    • Applying for new accounts on a frequent basis can make you appear desperate to lenders. In other words, it may look like you weren't responsible with the credit you had, so now you need more. While they may grant it to you, it will likely ding your credit score for a period of time.

What else should I know?

  • Checking your own score will not lower it.
  • Inaccurate information on your credit report can lower your score, so fix any inaccuracies as soon as possible.
  • You do not need to carry a monthly credit card balance to build your credit history.

Tags: Money Smarts, 1FBUSA, 1st Financial Bank USA, 1st Financial Bank