What's Your Number? The 411 on Your Credit Score
You know your credit score is important—but, if you’re like most, you probably don’t exactly know what it means. But, it’s key to your financial future to understand what goes into it (and especially if you’ve got a low score, what you can do to bring it up to par). Here’s a quick primer on everything you need to know about your number.
What does the number related to your credit score mean?
Your credit score is a number between 300 and 850, calculated using a standardized formula from the information on your credit report. A score below 600 is considered poor, and anything above 720 is excellent.
Why is it important?
Basically, the higher your credit score, the lower the risk a lender assumes in giving you a loan. With a great credit score, not only will you more easily qualify for everything from credit cards to car loans and mortgages, you’ll also pay a lower interest rate—saving you lots of money in the long run. Not looking for a loan? You should know that landlords and prospective employers can check your credit as well.
What’s on my credit report?
When you look at your credit report, you’ll see that it’s made up of four main parts:
Identifying Information: This includes your name, address, social security number, birth date, and employment—and has no effect on your credit score. It gets updated from the information you supply when applying for a loan.
Trade Lines: These are all of your credit accounts—car loans, student loans, mortgages, and credit cards—along with your available credit, the balance of what you owe, how long the account has been open, and your payment history.
Credit Inquiries: This shows the number of times you’ve applied for new credit in the past two years.
Items on the Public Record: This is information gathered from the records of state and county courts, including bankruptcies, foreclosures, repossessions, civil judgments, and wage garnishments.
How does all of this boil down into a numeric score?
The data in your credit report is grouped into five categories, each of which is weighted and factored in to the calculation of your score. While the importance of each category ultimately depends on your credit history (for instance, if you’ve got a great score but limited credit history, you’re treated differently than someone who has 20 years of credit), here’s how it roughly breaks down.
35% Payment History: Paying your bills on time is the biggest thing you can do to keep (or build) a high credit score. Even if you can only make the minimum payments on your credit card, sending them in when they’re due will do the most to maintain your credit score.
How much a delinquent payment will adversely affect your score varies. If you forgot to make last week’s credit card payment, don’t sweat it: You’ll probably pay a late fee, but anything paid within 30 days of the due date is not going to be reported to the credit bureaus. Late payments show up on your report as 30, 60, or 90 days late, and if the account gets turned over to a collections agency, that will show as well. (If it’s a one-time slip up, you can ask the lender not to report your mistake. There’s no guarantee they’ll agree, but it doesn’t hurt to try if you’ve got a good explanation.)
30% Amounts Owed: This is most important when it comes to revolving credit lines (such as credit cards and home equity lines). Maxing out the credit that’s available to you will significantly impact your score when you go to apply for more. Especially when you’re just starting to establish credit and have only a few accounts, try to keep the balance on your credit cards below 50% of their limit.
Also, showing that you are paying down your installment loans (loans that you pay down over a predetermined period, such as car loans and mortgages) proves that you’re adequately managing your debts.
15% Length of Credit History: The longer your credit history, the higher your score may be. A lengthy history of on-time payments shows a lender that you manage your money well.
10% New Credit: Applying for several new loans or credit cards within a short time period can raise red flags. But don’t use that as an excuse to not shop rates. Inquiries from a few car dealers or multiple mortgage lenders around the same day shouldn’t impact your credit score—actually opening a few new loan accounts, however, will.
10% Types of Credit Used: You may have heard of “good debt” versus “bad debt.” Mortgages and installment loans (loans that you pay down over an established period of time) are typically considered “good debt” by lenders, because you’re not going to be increasing the balance at any point. Revolving loans, like credit cards and lines of credit, sometimes get a bad rap because you can max them out at any point. Your credit report, though, looks for a mix of credit types. If you’re just establishing credit with your first car loan or an introductory credit card, your score may be slightly lower.
How do I check my credit score and report?
Visit annualcreditreport.com. You’re entitled to three free copies of your credit report each year, one from each of the major credit reporting bureaus (Equifax, TransUnion, and Experian). And take advantage of it—you’ll want to make sure you recognize each of the trade lines on your report. If something looks amiss, get in touch with the credit bureau ASAP to file a dispute.
The report itself will not include your credit score; but you can find yours out for free with a site like Credit Karma. (Be wary of less-than-reputable credit checking sites that charge for their services—you shouldn’t have to pay.)
I have a low score. What can I do—and how long will it take to bring it up?
Unfortunately, there’s no quick answer, as it varies widely based on your situation. I recommend consulting with someone who can walk you through your budget and financial portfolio to see what you can do to improve your credit. Your bank or credit union may provide this service.
Meanwhile, review your budget to make sure that you can at least be making the minimum payments on your current debts on time. Then, focus on bringing up to date any accounts you’ve let go delinquent or that have been transferred to a collections agency. Can you consolidate any of your debts? Lenders may be able to make some modifications to your current loans to help you afford your payments. Be proactive and recognize that raising your score won’t be easy or immediate—but it will be worth the work.
What if I don’t have credit? How can I get started?
It’s a good idea to plan ahead when it comes to your credit, especially if you’re looking to qualify for a large loan like a mortgage at some point in the future. You’ll need to build your credit history with smaller “secured” loans, often with a co-signer or collateral. Your starting point could be a lower limit secured credit card (which means that your bank has set aside a sum of money from your accounts equal to the credit limit on your card). Car loans are also a typical introductory loan, because the car serves as collateral, though you may still have to make a significant down payment up front.
To learn more about your credit score, check out the resources at myFICO.com. And check out the next Pennywise column on the benefits—and drawbacks—of store credit cards.
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