Your credit score is a number that can affect everything from your ability to get a loan and the interest rate you pay on that loan to your ability to get a job. It has a great deal of power over your life, so understanding it is very important. Here is some important information everyone should know about what a credit score is and how you can improve it.
To start, what is a credit score? A credit score is a number based on an analysis of your credit files that altogether represent your creditworthiness. The information for your credit score primarily comes from a credit report provided by each of the major credit bureaus including Experian, TransUnion, and Equifax. The FICO scores are the most common scores lenders use from each of those bureaus. The other credit scoring model is called Vantagescore 3.0, and it is an alternative to the FICO score. It is calculated in a similar fashion to your FICO score, however, while FICO scores require at least 6 months of credit history to calculate a result, a Vantagescore 3.0 can be calculated with just one month of history.
What Are These Scores Made up Of?
A number of factors make up your credit scores; and those are (in order of importance): payment history, credit utilization, average credit age, account mix, and inquiries.
What Is a Good Credit Score?
A good credit score generally starts in the upper 600’s and an excellent credit score can top out at 850. Scores below 649 are considered poor, and scores below 599 are bad.
What Is the Impact of a Bad Credit Score?
A poor credit score can cause a host of problems ranging from the obvious—an inability to qualify for a loan—to the not so obvious, not being able to qualify for a job.
That’s right, some employers actually use your credit report to determine if they will hire you. Something to know here is that they cannot actually see your score, and they can only get a copy of your report with your permission. When an employer requests a copy of your credit report they are given a report that is made specifically for employers; and while your score isn’t on it, a history of bankruptcies, delinquencies, and other behaviors that may indicate untrustworthiness or a lack of personal responsibility will be.
A poor score can also cause you to pay higher interest on any loans you take out, including an auto loan. Moreover, your credit limit will be lower on any new credit you obtain. In short, life is harder with a lower credit score.
How Can I Improve My Credit Score?
As discussed earlier, payment history, credit utilization, average credit age, account mix, and inquiries impact your score. To improve your score you must address each of these issues independently.
First, you’ll want to make sure you have a steady credit payment history. One of the easiest ways to do this is to set loans such as auto loans or credit card payments to auto payment. This regular schedule will help to improve your score.
Another issue that plays a big part in calculating your credit score is credit utilization. This counts for both overall utilization of your total credit limit and for each individual account. So keep your utilization below 30% both per card account and per total usage to make the credit bureau happy.
Average credit age is the third most important factor that makes up your credit score and this is something you also have a lot of control over. The best way to keep this factor from negatively impacting your credit score is to maintain any open cards with a low balance and to not open any new accounts. This will allow the average age of your credit to go up every month.
Account mix makes up the next most important category in calculating credit scores. Don’t go out of your way to spend extra to add to this category, but FICO scores are positively benefitted by utilizing the following types of credit:
- Installment loans such as an auto loan or student loans and furniture purchases
- Mortgage loans
- Bank credit cards
- Retail credit cards
- Gas station credit cards
- Rental data
Finally, inquiries are the last factor to be considered when calculating your credit score. There are two types of inquiries. Hard inquiries, such as those made when applying for a new loan, will shave points off of your score and soft inquiries, which often happens when you don’t even know it—such as when you receive those “pre-approved” offers in the mail. Using a free credit report site such as CreditKarma is a soft inquiry and will not lower your score. Furthermore, checking them monthly is a good way to check your progress and also make sure there are no erroneous marks that are bringing down your credit falsely.
Remember, a good dose of common sense and a slow and steady approach to improvement are the best ways to bring up your credit score. This will help you begin on the path to better credit, lower interest rates, and financial stability.
