What is a credit score?
To put it simply, your credit score tracks your how you pay your debts. You will use your credit score to buy a car, rent or buy a home, and other important life purchases. It is important to recognize that credit doesn’t correlate with how much money you make, but the choices you make when it comes to your finances.
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Ultimately, your credit score is a tool that you can use to leverage other people’s money so that you don’t have to use your own. This applies whether you have the cash on hand or not. If you had to make a purchase would you rather put your use your money or someone else’s money for a fee?
This is the power of credit and why it is important to try to have the best score possible.
Who are the credit bureaus?
There are three national credit bureaus in the United States that update and track consumer credit history. Those bureaus are Exquifax, TransUnion, and Experian.
A frequently asked question is why isn’t your credit score the same across all three credit bureaus? The reason for this is because the credit bureaus report information at different times and display information differently. Based on the information that has been reported at a given time, the score could be slightly different. This is why it is important to check your credit on all three credit bureaus so that you don’t miss any details or potential errors that can impact your score.
How do I raise my score?
The following categories are a breakdown of how your score is calculated. By understanding the criteria in which your score is calculated you can use this information to improve your score over time.
Payment History
Making regular payments is extremely important. This shows creditors if you pay your bills consistently and how much of a risk you are to lend money to. Your payment history makes up 35% of your FICO score. Pay your bills on time or early. I recommend paying your bills consistently even if you are paid ahead. If you are worried about forgetting a bill, set up autopay with your bank and automate the process of paying your bills.
Credit Utilization
Keep your utilization as low as possible. Anything over 30% utilization is considered high risk. For example if you have $10,000 in available credit, you should not use more than $3,000. This is because lenders do not want to extend credit to someone who is high risk. If you use the majority of the credit that is extended to you at any given time, this is seen as a red flag. Your credit utilization makes up 30% of your FICO score.
Remember that this is your overall utilization and not by credit line. For example if you have two credit cards where Card 1 has a $3,000 credit line and Card 2 has a $7,000 credit line, if you use $1,500 of Card 1 and $0 of Card 2 you are utilizing 50% of the credit limit on Card 1 but your total utilization is only 15%.
I try to keep my utilization extremely low. I do this by making payments throughout the month. For example, if I know that I will be making a lot of large purchases throughout the month, I will pay my card off weekly.
Another option to balance this out is to increase the total amount of credit you have. For example, if you get another line of credit and keep your spending the same, your utilization will go down and your credit score will go up! An easy way to do this is by getting a credit card.
Credit History/Age of credit
The older the credit is the better standing it has on your credit report. This is a part of your credit score that will take time to build. As long as you are consistent with making payments and patient it will do great things for your credit score in the long run.
Try to keep your oldest credit lines open. For example, if you got a credit card 10 years ago, don’t close that card! All of that history is an important part of your credit score. If you find that you have other cards that work better for you, take the old one out every once in a while so that it is not terminated for lack of use.
The age of your credit is incredibly important. This is why I recommend that people start as early as possible. Check out my post on the benifits of building credit in your 20s by opening a credit card.
Types of Credit
Borrowers want to see that you can manage multiple types of credit. These are the two main lines of credit:
- Revolving Credit – This is when you have a credit limit that can be replenished once paid back. Examples include credit cards and lines of credit.
- Installment Credit – These are fixed payments that are made over a specific period of time. Examples are mortgages, student loans, car loans, and other personal loans.
Hard Pulls
If you are applying for a new line of credit, creditors will typically pull your credit report which will result in a hard pull. A hard pull will affect your score for a couple of months but it is only temporary. If you are looking to buy a house or a car be mindful of when you last had your credit pulled as this can impact your interest rate on your next loan.
Oftentimes when you are shopping around for the best interest rate you are allowed to go to multiple places and it will only show up as one hard pull.
The reason hard pulls reflect poorly on your score is because it is a potential flag of high risk. Remember, lenders want to lend to people that are reliable. They want to see that you are well within your means to pay them back. The more credit you are constantly applying for, it can come across as being financially unstable and in need of quick cash.
How to check your credit
If you need to check your credit, it is important to know that you get one free credit check a year. However, there are a lot of things that can happen in a year including identity theft, incorrect charges that need to be disputed, and fluctuating spending habits that may impact your score.
If you are looking for a credit monitoring service the options below that allow you to check your score regularly and have peace of mind that your score is going in the right direction… UP!
TransUnion
Below are the services TransUnion offers with their plans:
- Credit Report
- TransUnion Score
- Credit Score Simulator
- Credit Lock
- Debt Analysis
MyFICO
MyFICO offers the following services with their plans:
- FICO Scores
- Credit Reports
- Credit score and credit monitoring
- $1 million identify theft insurance
- 24×7 identity restoration
- Identity monitoring
Either of these are a great tool if you are worried about fraudulent activity or are planning to take out credit and want your score to be as high as possible. The higher your score, the better your interest payment. You’d be surprised how much of a difference a few points can make over time in your interest payments!
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
