By now, it’s clear that our modern lives are being monitored. Because most purchases we make are tracked electronically, businesses are able to monitor where and how we spend our money.
Over time, the way we use credit is monitored and used to assign each of us a credit score as well. This number, your credit score, invisibly follows you everywhere, impacting your life in more ways than you can imagine. A three-digit manifestation of your credit health, your credit score can mean the difference between qualifying for a loan you need or missing out.
Keep reading to learn more about your credit score, how it is determined, and why it may matter more than you think.
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Who is Keeping Score?
When we talk about credit scores, it’s easy to wonder who is doing all of the compiling of data. By and large, the three big players in the credit score business are the three major credit reporting agencies, Equifax, Experian, and TransUnion.
Each of these companies makes money selling your credit information, history, and your credit score to banks, businesses, and even potential employers. Your credit report details your payment history, the amount of debt you’ve piled up, and where you work and live. It even includes if you’ve ever been sued, arrested, or filed for bankruptcy. All of this information is used to generate a credit score – basically a grade – that measures your financial reliability. The higher the score, the better. Each credit bureau develops their own score, but the information is all compiled and interpreted by a company called FICO (formerly Fair Isaac Corporation), which generates a single score that most creditors use.
Your credit score plays a big part in your life, even if you’ve completely sworn off debt. If you are looking to rent an apartment, buy a house, purchase insurance, or get a new car, your credit score will come into play. Even if you’re trying to get a job, many potential employers will have you sign a disclosure so they can access a modified version of your credit report. For better or worse, it’s a number that is being stamped on your life as a grade for your character and dependability.
What is a Good Credit Score?
When it comes to the most popular type of credit score, your FICO score, you may be assigned any number between 300 and 850. Generally speaking, a credit score of 700 or higher is considered favorable. Here’s how other ranges of scores ranked when compared to the norm:
- Anything under 640 is considered a poor score: You’re likely to be considered a high-risk borrower, and that means your credit card interest rates will be much higher than average and you won’t qualify for a typical loan.
- A credit score of 641-680 is fair: You may qualify for that loan or credit card, but your rate will be relatively high.
- A credit score of 681-720 is good: You’re in the pocket. With a score in this range, you’ll get plenty of credit card offers, qualify for loans with good rates, and pay lower insurance premiums.
- A credit score of 720-850 is excellent: At this level you get the best rates on credit cards, car loans, and home mortgages. Above 720 is generally considered a “perfect” score.
What Affects My Credit Score?
The “how and why” of your credit score doesn’t have to be a mystery. There are tangible reasons why your score changes, and specific steps that can be taken to improve it. Let’s look at the factors that impact your credit score the most, according to FICO.
- Credit History (35%) – Timely repayment of borrowed money is the most important factor in your credit report, impacting 35% of your FICO score. This includes credit cards, retail accounts (like department store credit cards), loans, and finance company accounts. A single late payment can impact your score for up to seven years. Your credit history also includes bankruptcies, foreclosures, lawsuits, and other public record and collection items. These legal actions can impact your score for up to 10 years, though the impact slowly decreases with time.
- Amounts Owed (30%) – Carrying a large debt load can lower your score, even if you make payments on time. Having used a large portion of your available credit can account for 30% of your credit score. FICO also considers remaining balances due, as well as the number and types of credit accounts you have.
- Length of Credit History (15%) – The longer you’ve managed credit, the better. Having a brief credit history can lower your score.
- Types of Credit (10%) – This is not a key factor, accounting for only 10% of your FICO score, but still a consideration. Try to have a good mix of credit; retail accounts, credit cards, installment loans, and a mortgage are all considered. For example, not having a credit card can actually lower your score.
- New Credit (10%) – FICO believes that having several new credit accounts pop up in your report within a short period of time means you represent a greater lending risk, especially if you have a short credit history.
Tips to Improving Your Credit Score
There are a lot of moving parts that make up your credit score. Fortunately, a handful of small steps and simple moves can truly improve your score over time.
Want to boost your score to get the credit you want? Here are some tips that can help:
- Start early. You like this one, don’t you? To get your credit on the right track, it helps to start as early as you can. If you don’t have a credit card or any other line of credit, opening a new account is your best bet. If you can’t qualify for an unsecured credit card, consider a secured credit card instead.
- Keep your credit utilization low. If your Visa card has a $1,000 credit limit, train yourself to use just half – or less – of that available credit. By thinking of your card as maxing out at $500 instead of $1,000, and disciplining yourself to spend less than the credit limit, you will lower your “balance-to-limit” ratio, which can help raise your score. This only applies to revolving consumer accounts, not to your mortgage or installment loans.
- Always pay on time. Since making timely payments is the greatest factor in your credit score, make the process as painless as possible. Using automatic reminders or payments can help, but remember to set the payments for an amount greater than the required minimum and be sure to keep enough cash in the bank to cover the payment each month.
- Pay off old accounts, then keep them open. Once you pay off a credit card that you think would be best retired permanently, don’t use it again but don’t close the account, either. Keeping it open will maintain your available credit, and by not using it you’ll enhance your balance-to-limit ratio.
Get a Free Copy of Your Credit Report
You can’t fix your credit score if you don’t know what it is. To find out where you stand, you should order a free credit report right away. Thanks to the Fair Credit Reporting Act (FCRA), each credit reporting agency must provide you with a free report once a year.
There is only one official site for obtaining your free report and it is AnnualCreditReport.com. Watch out for bogus sites claiming to be the official “free credit report” website. You can also call (877) 322-8228 to order the free report.
Once you have your credit report in hand, you’ll want to check it for accuracy. Make sure your address and other personal information are correct and then review each credit account, looking for inaccurate amounts owed and verify that each credit account is actually yours. If you find errors, you’ll need to contact the individual credit agency issuing the report to begin the correction process. You can find help on correcting credit report errors, including a sample dispute letter at the Federal Trade Commission website.
When you’re diving into the pages of your credit report, you may start scrambling to find your credit score. Let’s hope you stuck with me this far, because while your credit report is free, your credit score is not. You have to buy your FICO score for roughly $20 from myfico.com. There are services that offer an estimate of your credit score – some saying they will provide these “educational scores” for free – but it’s probably best to stick with the real thing.
The End Game
Now that you know just how critical your credit score is to your financial life, you’re empowered to nurture your number. The key is to not only know your score, but to take actionable steps to improve it over time. With the right attitude and tools, you should be on your way to good credit in no time.