No, I am not asking for your phone number.
In recent posts, I’ve talked about other financial numbers like budgets and net worth. Today’s post is focused on another number, your credit score.
Where to Get Your Credit Score
A great way to kick off this post is to start with where you can find your credit score. There are three credit bureaus that provide consumers with a free and extensive credit report annually. These credit bureaus include:
One thing to note is that the reports generated by the bureaus above are more comprehensive than the FICO credit score provided by your bank or credit card provider. The FICO score is just a number where as the credit report from each bureau is comprehensive summary of your lines of credit, credit history and record of credit inquiries. The overarching reason for pulling a credit report at a regular intervals is to check for errors or potential fraud.
A suggestion my father gave me, that I will pass on to all of you, is to set-up reminders to run your credit report every four months rotating through the three credit bureaus. The end result is three free credit reports a year, one every four months. Again, the purpose of pulling these reports is to track any changes to your credit history and flush out any errors or fraud.
Range of Numbers
Your credit report will be fairly comprehensive and provide a list of all known lines of credit. Be sure to spend some time looking at each line of credit listed to ensure accuracy. If there is something on there that seems out of place, that could mean your identity has been compromised and should be researched further.
Beyond the inventory of active lines of credit and history of credit inquiries you will be a credit score. This will be a number between 300 and 850 which serves as your “grade” for how well you use your credit.
- Excellent: 720-850
- Good: 690-719
- Fair: 630-689
- Poor: 300- 629
Why does it matter if you have a high credit score? They way that I think of it, the higher the credit score the more flexibility you have as a consumer. Having a strong credit score can result in lower interest rates on credit cards and loans, increased chances of having additional lines of credit approved and sometimes better car insurance rates.
Where does your number fall and how can you improve your score if it’s lower than you’d like? To answer this you must first understand the factors that go into computing your credit score.
Credit Score Factors
There are five primary factors accounted for when computing your credit score. The scoring and weighting system behind these factors gets fairly complicated so the focus of this post will be to introduce you to theses five factors.
1. Payment History
Payment history is the most impact of all the factors, accounting for 35% of the overall credit score. Your payment history looks back at past credit related bills to see if they were paid on time, late or outstanding. The easiest and most impact way to improve your credit score is to pay all your credit related payments on time. This includes payments like credit cards, car loans, student loans, mortgages, etc.
2. Credit Utilization
Credit utilization is a percentage that can be calculated by taking the total credit being used and divide it by total credit limit. Your credit utilization makes up 30% of your score and the utilization limit should be under 30%. A pattern of credit utilization between 10-30% will have a meaningful positive impact on your credit score.
As an example, if you have a credit card with a total credit limit of $10,000, the goal would be to keep an outstanding credit balance of $3,000 or less to stay within the 30% threshold. Having a credit utilization of over 30% will hurt your credit score and having a credit score under 10% will greatly improve your credit score.
3. Credit History Length
This factor takes into consideration the age of your credit and contributes to 15% of your credit score. Having “older” credit will increase your score and having “younger” credit will take away from the score. A longer credit history shows prior experience and understanding of how to properly handle credit.
Opening new lines of credit or closing existing accounts are ways to bring down the average age of your credit which can have a negative impact. Don’t be discouraged if you are relatively new to using credit, your score will build up over time as your credit tenure increases and remember this factor only contributes to 15% of the overall score.
4. Credit Mix
Credit mix accounts for 10% of the overall credit score. Credit mix is in reference to the type of credit lines open and their varied uses.
The two major types of credit are revolving accounts and installments loans. Revolving accounts are lines of credit like credit cards or home equity lines of credit, where each month the line of credit is available and can be tapped at the account owner’s discretion. Installment loans are just that, loans. Think mortgages, auto loans, student loans, etc. They are lines of credit that have been extended to you and are paid back in installments with an eventual end date.
Because credit mix is only worth 10% of the credit score, don’t feel obligated to go and take out a car loan to help improve your credit score. Making your payments on time and keeping credit utilization low will have a far greater impact that multiple types of credit.
5. New Credit
This final factor of credit makes up 10% of the overall score and is activated every time a new credit application is submitted on your behalf. This portion of your credit score looks specifically at “hard” credit pulls in the last 12 months. An example of hard credit pulls include (but not limited to) an application for a new credit card, car loan, or mortgage. A “soft” credit pull are things like pulling your credit score from one of three bureaus above to check your score and flag any issues.
One or two credit pulls every year won’t have a major impact on your credit score but several inquiries in a short period of time can have a negative impact. Something to keep in mind is that “hard” credit pulls roll off your credit report after 24 months.
Ways to Hurt Your Credit Score
So there you have it, the five factors that contribute to your unique and personal credit score. Below is a summary of some easy ways to hurt your credit score.
- Missing or late payments
- Using too much credit, credit utilization of over 30% of credit limit
- Applying for multiple lines of credit in a short period of time
- Defaulting on accounts – foreclosure, bankruptcy, repossession, settled accounts, etc.
Ways to Help Your Credit
To wrap up this post on a high note, a list of ways to improve your credit score.
- Pay bills on time and make outstanding payments
- Pay down debt to keep credit card utilization between 10-30% of credit limit
- Dispute wrong information on your report
- Limit new credit requests
Now go out there and be a good steward of your credit! Hope this post gave you a few ideas on how to improve your credit score.
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