What You Need To Know About Your Credit Score

Building credit may not be a priority, but it should be.

Lenders check your credit score whenever you want to finance, whether for a student loan, a credit card, internet service, or a cell phone.

Your credit score is an important indicator of your financial health. It is a tool lenders use to assess your creditworthiness and is used by individuals who want to live a better life.

Here’s what you need to know about your credit score to make the most of it. 

What Is a Credit Score?

Your credit score is a three-digit number based on your credit history.

Banks, credit card companies, and mortgage lenders use your credit score and credit history to predict how likely you are to repay a loan on time.

Your credit history tracks loans and other financial obligations along with your credit card limits, monthly payments, on-time payments, and late payments.

To start a credit history, you must be employed and have some form of credit activity. You can begin as early as eighteen-year-olds (18). At 18, you are a full-fledged adult with rights and responsibilities; you can vote and sign contracts.

You may not have a credit score if you’ve never taken out a loan, held credit cards, or engaged in other credit-related activities (student loans). In this case, you might be considered credit-invisible.

Fun Fact:

A credit report only reflects payments, balances, and accounts for the past seven years. This is called the 7-year rule.
There are three individual credit scores. Read below to find out which one is the most important.  

How To Check Your Credit Score.

AnnualCreditReport.com is a website authorized by the federal government that issues free credit reports from all three credit reporting agencies. You’re entitled to a free copy of your credit report annually from each of the credit bureaus through AnnualCreditReport.com. You can request reports online or by mail.

• Visit AnnualCreditReport.com
• Call 1-877-322-8228 
• By filling out the Annual Credit Report request form and mailing it to

Annual Credit Report Request Service 
PO Box 105281
Atlanta, GA 30348-5281

Fun Fact:

Several other sites, such as Creditkarma, Experian, Equifax, and Transunion, give you access to your credit score and credit reports. Credit card companies also allow you to view a snapshot of your credit report. Read the fine print before signing up. 

How Your Credit Score Works.

Credit scores range from 300 to 850 in the United States. The higher, the better. An excellent credit score opens doors to various privileges because it shows lenders you are more likely to repay a loan on time and suggests you are at lower risk (of defaults). 

Individuals with a credit score of 740 or higher look more attractive to borrowers and can unlock exclusive financial perks such as high limits ($15,000 +), 0% promotional APRs, balance transfers, and even 0% financing on a car. Here is a breakdown of the score range. 

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

Additionally, your credit scores can also be used by landlords, insurance companies, and employers to make decisions about rental applications, insurance premiums, or employment offers. 

It’s important to note that a Social Security number is not required to create a credit report or score. While a social security number can help link credit activities to an individual, alternative methods exist. These options include a credit builder loan or becoming an authorized user on another person’s credit card. If you want to be an authorized user, ensure the primary cardholder pays their bills on time and in good financial standing.

Your credit report also includes identifying information such as:

• Name 
• Birth date
• Social Security number
• Addresses (past and present).
• Current and past credit accounts
• Payment history, (paid on time)
• Missed payments, (credit cards, hospital, cell phones)
• Collections
• Bankruptcies
• Repossessions
• Foreclosures

Furthermore, it also records who checks your credit score and credit report. For example, when you apply for credit or a marketer pre-approves you for a credit card. 

Fun Fact: You can fix any errors on your credit report, such as your name, social security number, missed payment, credit card balance, etc., by contacting the individual credit bureaus. You can not add any loans that may be missing from the report.  

• 
  The Best Age To Start Building Credit 
  •  How To Build Credit From Scratch
  •  How To Apply For A Credit Card

How is Your Credit Score Calculated.

Understanding credit score calculations can be complex, so I’ll start with the fundamentals and then narrow it down to the key aspects you should focus on. For starters, three credit bureaus, Equifax®, Experian®, and TransUnion®, collect and maintain credit information.

Did you agree to a monthly installment plan on the latest cell phone? 

This is great if you need the $600+ to buy a new iPhone or Samsung phone. 

You’ve entered into a finance agreement.

Credit information is collected every month from any company where you have a finance agreement, open balance or line of credit. Additional examples are your university student loans, credit cards, cash advances, and store credit cards. 

Secondly, credit reporting agencies use the “FICO Score” algorithm to develop your credit score. The exact formula is unknown since it is proprietary, but we do know the primary factors that contribute to a credit score:

Payment History (35%)
Credit Utilization (30%)
Length of Credit History (15%)
Credit Mix (10%)
New Credit Applications (10%)

Here is where we dive into the good stuff. The “FICO Score” algorithm is not in your control, but knowing the percentage of each factor can give you a better understanding of how they work so you can maintain a high credit score.  

1. Payment History (35%): This is the most significant factor and assesses whether you’ve paid past credit accounts on time. Always make your payment by the due date. Late payments, defaults, or bills in collections can negatively impact your score.

2. Credit Utilization (30%): This factor looks at the amount of credit you use compared to your total available credit limit across all accounts. Keeping credit card balances low relative to your credit limits can positively impact your score.

3. Length of Credit History (15%): The time you’ve had credit accounts plays a role, but it’s less critical than numbers 1 and 2. An extended credit history tends to be more favorable, showing a track record of managing credit over time.

4. Credit Mix (10%): A diverse mix of credit accounts, such as credit cards, installment loans like student loans, or personal loans, can positively impact your score. It shows that you can manage various types of credit responsibly.

5. New Credit Applications (10%): Opening several new credit accounts within six months might indicate financial stress and can negatively impact your score. Each new credit inquiry (hard inquiry) can slightly lower your score. 

Quick Recap:

Making on-time payments and keeping your revolving balance low can positively impact your credit score.

Conversely, missed payments, high balances (high credit utilization), and new credit inquiries can lower your score.

Fun Facts: A late payment is considered missed when you are 30 days past the due date. If you notice you missed a payment, try your best to pay it as quickly as possible. 

Credit Utilization represents the amount of revolving credit you use divided by the total credit available to you, expressed as a ratio or a percentage. Credit cards are revolving credit. Experts recommend keeping utilization ratios under 30%, but individuals with the highest credit scores have utilization ratios under 10%.

A credit inquiry is when a creditor checks your credit report. Any time you submit an application that asks for your social security number, there is a high probability you are permitting them to check your credit. Also known as a credit inquiry or a hard pull. Credit inquiries are listed on your credit report and remain for up to two years.

How Credit Inquiries Work

There are two main types of credit inquiries: hard and soft. Hard inquiries happen after you apply for a loan. Hard inquiries harm your credit score. Unfortunately, it is a necessary evil when looking for financing.

Generally, a high number of hard credit inquiries in a short period (1 month) can make you seem desperate for money, which makes you an increased risk. It’s best to keep hard inquiries to a minimum. There are some instances when shopping around is encouraged. These loan types include a mortgage or a student loan. Lenders will typically ignore these inquiries.

Remember, your credit report is updated monthly, so loan companies can see any time you apply for a loan. 

Common hard inquiries include 
• Utility applications
• Rental applications
• Auto loan applications
• Mortgage applications
• Credit card applications
• Student loan applications
• Personal loan applications
• Cable, Internet applications

Soft Inquiries do not negatively affect your credit score. Common soft inquiries include:

• Background check
• Employment verification 
• “Prequalified” credit card offers
• Checking your credit score

Fun Fact: 
When applying for financing, ask the lender if they can do a soft inquiry instead or a hard inquiry. That option may be available. You can also provide them with a copy of your credit report. They cannot make a final decision based on the information you provided but can do a preliminary review.   

How To Build Your Credit

• 
  The first step to building credit involves some form of credit activity. It’s essential to focus on credit accounts that require a hard inquiry and are regularly reported to the three major credit bureaus. Some options include a secured credit card, a small loan, or becoming an authorized user on someone else’s credit card.
  
  •The second step to building credit is making timely payments on your accounts. Timely payments help establish a positive credit history, contributing to your credit score over time. 
  
  •The third step to building credit is regularly monitoring your credit report for accuracy, as errors can negatively impact your score. Be proactive and check your credit report at least once a year. 
  
  Fun Fact:
  If you have a student loan, chances are you already have a credit score and credit report. 

3 Different Credit Scores and What They Mean

The three major credit bureaus—Equifax, Experian, and TransUnion—calculate credit scores independently using their proprietary scoring models. Despite the differences, all three credit scores are equally important. 

Here are some additional reasons why your credit scores might be different. 

1. Many lenders report information to all three credit bureaus, but small financial institutions may only send data to just one. 

2. Equifax, Experian, and TransUnion charge banks and other institutions a fee for accessing their credit reports and related services. These fees depend on the depth of information the lenders are requesting, such as detailed credit reports, credit scores, monitoring services, or specialized analytics. This relationship may cause hard inquiries on one credit report rather than all three, leading to different credit scores.

3. Credit bureaus perform monthly updates at different times of the month. Your credit score is dynamic and can change based on your financial behavior. It changes any time you swipe a credit card or make a payment. Some credit bureaus update their information at the beginning of the month, and some do it towards the end of the month.

Fun Fact: Before applying for a credit card or loan, ask the lender what their requirements are and which credit bureau they work with. This will allow you to check beforehand and decide if it is worth a credit inquiry. 

Final Thoughts

Sustaining a solid credit score is pivotal for your prospects. Especially when approaching a new milestone like a promotion or a new relationship. This period marks the peak time for securing a new apartment, purchasing a home, buying a new car, or setting up new utility services. A higher credit score simplifies loan approval and can open doors to a more fulfilling life experience. However, credit scores are not the sole factor lenders consider when determining loan limits and rates. Other aspects, such as income, employment history, debt-to-income ratio, and savings, also play a role in the interest rate offered.