What You Should Know About Credit Scores
Your credit score may seem random, but it tells lenders and other creditors a lot about your financial behavior. It’s calculated from a mix of factors in your credit report and suggests how likely you are to fulfill financial obligations, such as a lease or loan.
What is a Credit Score?
A typical credit score falls somewhere between 300 and 850 (though some industry specific ones could go as low as 250 or high as 900). The higher the number, the better your credit history. A score of 670 or higher is considered “very good,” but the average score nationwide is around 700. Keep in mind that those with a longer established credit history with good payment profiles tend to have higher credit scores than those that have a shorter credit history.
How a Credit Score is Used
Your credit score can be used by lenders, creditors, and even insurance companies to gauge your creditworthiness. The more "creditworthy" you are, the easier and cheaper it is to borrow money, secure insurance, and qualify for lower interest rates.
Landlords may do a credit check (which may not include your credit score directly but includes information about how you use credit) to assess how responsible you are and decide whether to rent you an apartment. In short, a good credit score and a responsible history of using credit matters.
What’s Included in Your Credit Score
Technically, you have several different credit scores, one from each of the main credit bureaus, Experian, Equifax, and TransUnion. Each of these bureaus collects data on your financial behavior and uses it to calculate a dynamic score that changes based on the information they have and even the date you check it.
Your credit score is constantly changing based on these factors and their approximate weights:
- Payment history (35%)
- Amount owed (30%)
- Account length (15%)
- Mix of account types (10%)
- New credit (10%)
What’s Not Included in Your Credit Score
Your saving and checking account balances, income, and buying habits don’t factor in your credit score, although lenders may use some info, like income, elsewhere on a credit application.
Assets like a car purchased without a loan won’t appear, either. There’s also no personal info like your marital status, race, or religious and political affiliations.
How to Improve Your Credit Score
The best way to boost your credit score is to manage your payment history. Pay on time, in full, and avoid late or missed payments. To do this, only spend what you can afford and don’t run balances too high or overextend yourself with loan payments. Staying below your credit limit can also help you get and keep a good credit score.
You may think that the best way to keep your credit score high is to avoid using credit, but that’s not true. Not using credit at all can damage your score, just like using too much credit does. Balance is key.
Boost Your Score Starting Now
Sometimes, you’ve got to spend money to make money, and the same is true for credit scores. You can’t buy a better credit score outright, but using credit wisely is a tried-and-true method for boosting your score over time. Choose the right card for you.
It is recommended to review your credit report at a minimum, annually. Federal law requires each of the three nationwide consumer credit reporting companies - Equifax, Experian and TransUnion - to give you a free credit report every 12 months if you ask for it. You can learn more about your free reports at the Federal Trade Commission’s website and the Consumer Financial Protection Bureau’s website.
References:
https://www.annualcreditreport.com/index.action
https://fairmontfcu.banzai.org/wellness/resources/credit-scores
