Why Your Credit Score Matters
Do you know the factors that make up your credit score? Image from WikiHow.com
Remember when you were younger and borrowed money from your parents? If they had the money, they would usually lend it to you knowing you would pay it back. But once you leave home, borrowing money relies heavily on your credit score, and not so much your parents…unfortunately!
What is a credit score?
A credit score is a number that comes from analyzing a set of factors from your financial history. The higher your number, the more creditworthy you appear to your financial institution. Having a high credit score indicates that you are a lower credit risk.
There are three credit bureaus in the U.S. (Equifax, Experian, and TransUnion) that maintain consumer credit files from which the factors of your financial history are pulled, and different scoring models that determine your credit score and where it falls within the acceptable credit score range. One of the most-used models that determine your credit score is called FICO (a FICO score.)
A FICO score takes these factors into consideration: your on-time payments, how much credit you've used (current debt burden), how long you've had credit, the types of credit you've had, and how many recent applications you've made for credit. Each of these factors is ranked in terms of importance:
Payment history - 35%
Debt load - 30%
Length of credit history - 15%
Types of credit - 10%
Recent credit applications - 10%
What is a good credit score?
The highest possible FICO score you can achieve is 850, while the range of the average American is between 301–800. Here is how the different ranges of credit rank according to most financial institutions (via credit.com):
• 750+ is excellent
• 700–749 is good
• 650–699 is fair
• 600-649 is poor
• 599 and under is usually considered subprime, or a score that needs serious improvement
Where your score is doesn't only determine how much money you can borrow, it helps determine what your interest rate should be.
How to improve your credit score
With a little patience, you can improve your credit in a few different ways.
- Think small—Open one credit card account for a small amount of credit and use it for purchases you know you can pay off each month, such as your cell phone bill. This will improve your payment history.
- Spend small—Never let your credit usage get close to the maximum. For example, if you have a $500 limit, try to keep your monthly balance at 30% of your limit. This will improve your debt load, and your score.
- "Rinse and repeat"—Doing the above 2 items consistently over time will improve your score, since your payment history and debt load, the 2 primary factors in a credit score, are also strong.
Are you wondering what your credit score is?
There are places where you can obtain a free credit report, or a more detailed credit report with a score for a small fee. Check out websites such as FreeCreditReport.com or CreditKarma.com. You can also try out SaveUp.com to hone your personal financial know-how skills by playing games and winning prizes.
You can also contact Bellwether to help you understand your credit score, learn how to improve it, and—more importantly—create a plan for the things you may need to purchase on credit, such as a new car or your first home. Call us at 603-645-8181 for answers to your credit questions!
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