by Kiara Swiatek Jan 11, 2022Share On:
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Credit scores, the elusive being of personal finances. Many don't know about the intricacies of the credit scoring system - much less their individual score. Many don't find out their score until they go to make a big purchase, such as a home or vehicle. The question, "What is your credit score?" can be daunting and embarrassing or fill you full of pride, but how did you earn that score, and what does having that score mean for you and your financial future?
Credit Score Basics
A credit score is a three-digit number between 300 and 850 that lenders and other financial professionals use to indicate your trustworthiness with credit; in simple terms, are you good for the money you are about to borrow from them. Your credit score is determined by your past track record of paying bills on time and managing credit cards correctly by not maxing them out. Your credit score can also be used in your application to rent an apartment, finance business opportunities, get small business loans, start a passive income business, obtain a real estate mortgage to purchase a home, and even in your application for a job.
Who Decides Your Credit Score
Various credit bureaus compile credit scores and reports from your credit-worthy history, such as credit cards, loans, and regular payments like cell phone bills. The three major credit bureaus in the United States are; Equifax, TransUnion, and Experian.
What Makes Up Your Score?
There are many different credit scores, but the most commonly used score is the FICO score. According to FICO, the major categories that determine your score are as follows, payment history (30%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Payment History is a track record of paying back your debts on time. This part of your credit score encompasses your payments on store cards, student loans, vehicle loans, and credit cards. A Late or missed payment on any of these regular bills will impact your score negatively.
Amounts Owed shows how much debt you have accrued and determines how much more you can handle. If you have a large balance or a nearly maxed-out credit card, you will be less likely to obtain a new line of credit or bank loan. If you go by the rule of thumb, which is to keep your debt under 30% of your limit on your cards, you will be more likely to get loans and more credit.
Length of Credit History is just that; how long have you been using any type of credit. The longer your history with reasonable payments, the more responsible financial institutions will deem you.
Credit Mix shows that you have various sources of credit ranging from auto loans, student loans to credit cards.
New Credit suggests that you are in the market to take on more debt through opening a new credit card or extending another line of credit. Each time you apply for a new line of credit, that application counts as an inquiry or "hard" hit on your score.
What is a "Good" Credit Score
According to FICO, an exceptional credit score is between 800-850, a very good score is between 740-799, a good score is 670-739, a fair score is 580-669, and a poor score is anywhere between 300-579. Of Course, these vary by company, but most fall within these parameters.
How Can You Raise or Fix Your Credit Score?
Knowledge is the first step in planning success; an excellent first step is to request a copy of your credit report from any of the three major credit bureaus so you can do a credit fix check. Review your report and confirm that all of the information is accurate; there can be mistakes - never assume that it is 100% correct! The next step would be to set up a schedule for debt and bill payments and make sure you are paying on time and even a few days early so you don't miss the due date. One missed payment can haunt you for years to come. The next step you will want to take is to reduce your reliance on credit cards and personal loans where possible. If you have a high utilization rate, your credit score will suffer. You can also meet with a credit repair specialist who will work with you and help with credit restoration and give you helpful tips to fix your credit score.
What Having Good Credit Can Do for You
Having a good credit score opens endless doors for you as a consumer, anywhere from securing a great interest rate on a credit card to buying a home. At the end of the day, having a good credit score ultimately puts more money in your pocket by lowering your interest rates or cost to borrow in the first place! Once you fix your credit, the doors you can open are limitless. You can open a business line of credit for a new business, get business credit cards, and even buy your dream home!
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