Your credit score is an important component of your financial health.
Your credit score (also called a FICO score) is a number calculated based on your credit history. Lenders use your credit score to evaluate your creditworthiness. In other words, lenders use your credit score to determine the probability that you will repay your loan on time.
Why Is Credit Score Important?
In addition to determining whether or not you are able to get credit at all, your credit score also determines how much it will cost you to get credit. The higher your credit score is, the more likely you will be able to get the best rates on auto loans, mortgages, credit cards, and other loans.
What Is A “Good” Credit Score?
Your credit score can range from 300 to 850. Lenders generally view anything above 690 favorably. Scores 720 and above are typically considered “excellent”.
How Do I Check My Credit Score?
Annualcreditreport.com will provide a free copy of your credit report once a year. While your report provides the details that make your credit score, it does not contain your actual FICO score. You will have the option to pay for your actual score.
How Is Your Credit Score Calculated?
Your credit score is calculated using information in your credit report (released by the 3 major U.S. credit bureaus – Equifax, Experian, and TransUnion). 5 major components with varying degrees of importance are used to determine your credit score.
5 Major Categories
Here is the breakdown of the 5 major categories as explained by Bryan A. Ruder, a Financial Advisor with Stifel, Nicolaus & Company:
- Payment History (35%) – Bankruptcy, collections, and delinquencies negatively affect your credit score. Delinquencies are reflected on your credit report for seven years.
- Amount Owed and Amount of Available Credit (30%) – Your debt as a percentage of your credit limits is another factor. Taking on a large amount of debt from many sources can adversely affect your score.
- Length of Credit History (15%) – Maintaining a good credit history over a long period of time can help boost your score. Work to build a long track record of consistently paying your bills.
- New credit (10%) – Your score takes a hit every time you apply for new credit. If you do this frequently, your score can be damaged. Credit inquiries will appear on your credit report for two years.
- Credit mix (10%) – Maintaining a mix of credit accounts, such as revolving credit (credit cards) and installment credit (mortgages, car loans) is preferable.
Note that your FICO score is non-discriminatory. Your credit score is solely based on the information in your credit report. It does not consider age, race, gender, religion, income, marital status, or employment.
Improving Your Score
Your credit score changes as new info is reported by your creditors, so over time your score will improve as you responsibly manage your credit.
Unfortunately, there aren’t any quick fixes for a bad FICO score. But over time with proper planning and dedication, you can successfully build your credit history. The sooner you start improving your habits, the sooner your score will improve!
Tips for Increasing Your Credit Score:
- Make your payments on time. If you’ve missed payments, get current and stay current. The longer you pay bills on time, the more your score improves. Payment history makes up 35% of your score, so delinquent payments and collections can really hurt your score. Set up automatic bill pay to make sure you never miss a payment.
- Keep credit card balances low. To maximize your score, use 10% or less of your available credit.
- Pay off debt instead of moving it between credit cards. Paying down revolving credit is the most effective way to improve your score in this area.
- Only apply for and open new credit cards when necessary.
- Review your credit report annually for inaccuracies. Contact the creditor and credit bureau to correct any errors.