Navigating the complexities of credit scores and reports can seem daunting, but understanding your score and the different factors influencing it will help you regain confidence and control over your financial life.
This guide will break down the basics of credit—what it is, why it matters, how it’s calculated, and what you can do to improve it. By the end, you’ll have a better grasp of your credit and how to manage it effectively.
What is a Credit Score?
Your credit score is a three-digit number that represents your creditworthiness, or how likely you are to repay borrowed money. Lenders use your credit score to assess the risk of lending you money, whether it’s for a credit card, personal loan, or mortgage. The higher your score, the more likely you are to be approved for loans with favorable terms, such as lower interest rates.
Credit scores typically range from 300 to 850, with higher scores indicating better credit.
Here’s a general breakdown of what the numbers mean:
- Excellent Credit: 750–850
- Good Credit: 700–749
- Fair Credit: 650–699
- Poor Credit: 600–649
- Bad Credit: Below 600
The most common type of credit score is the FICO Score, but there are other models, like the VantageScore. While the exact number may vary slightly between different models, the factors that influence your score remain largely the same.
How is Your Credit Score Calculated?
Your credit score is calculated using several key factors, each of which has a different impact on the overall score. Understanding these factors will help you know where to focus your efforts when trying to improve your score.
- Payment History (35 Percent): Your payment history is the most significant factor affecting your credit score. Lenders want to know if you’ve paid your bills on time. Late payments, missed payments, or accounts in collections will lower your score, while consistent on-time payments will boost it.
Tip: Set up reminders or automatic payments to ensure you never miss a due date. Even one missed payment can have a long-lasting effect on your score.
- Credit Utilization (30 Percent): This refers to the amount of credit you’re using compared to the total credit available to you. A high credit utilization rate – using more than 30 percent of your available credit – can signal to lenders that you’re over-reliant on credit, which could hurt your score.
Tip: Try to keep your credit card balances below 30 percent of your total credit limit. If possible, pay off your balance in full each month to maintain a low utilization rate.
- Length of Credit History (15 Percent): The longer you’ve had credit, the better it is for your score. Lenders like to see a history of responsible credit use over time. If you’re new to credit, your score may be lower simply because you lack a track record.
Tip: Keep older credit accounts open, even if you’re not using them regularly. Closing old accounts shortens your credit history, which can hurt your score.
- Credit Mix (10 Percent): Having a variety of credit accounts – such as credit cards, mortgages, and installment loans – shows lenders that you can handle different types of credit responsibly. While it’s not necessary to have every type of credit, a healthy mix can help improve your score.
Tip: If you don’t have a diverse mix of credit, don’t rush to open new accounts just for the sake of variety. Focus on managing your current accounts well.
- New Credit (10 Percent): Applying for several new credit accounts in a short period can lower your score, as it may suggest that you’re desperate for credit or are taking on more debt than you can handle.
Tip: Avoid opening multiple new accounts at once. Each time you apply for credit, a hard inquiry is placed on your report, which can temporarily lower your score.
Understanding Your Credit Report
Your credit score is based on the information in your credit report, which is a detailed record of your credit activity, and it will not be free, says the New York Times. It includes your credit accounts, payment history, and any inquiries from lenders or creditors. It’s important to check your credit report regularly to ensure that the information is accurate and up to date.
You’re entitled to one free credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can access these reports at AnnualCreditReport.com.
When reviewing your credit report, pay attention to the following:
- Personal Information: Make sure your name, address, and other personal details are correct.
- Credit Accounts: Verify that all listed accounts are yours and that the payment histories are accurate.
- Inquiries: Review the inquiries section to see which companies have accessed your credit report.
- Negative Items: Check for any late payments, collections, or public records (like bankruptcies) that might affect your score.
Disputing Errors on Your Credit Report
If you spot an error on your credit report – such as a payment marked late when you paid on time, or an account that isn’t yours – it’s very important that you dispute it. Errors can drag down your credit score, so correcting them is key to improving your financial standing. If you continue to have trouble after disputing an error, you may want to work with an FCRA lawyer who can help protect your rights as a consumer, says jibraellaw.com.
To dispute an error, contact the credit bureau that issued the report with the mistake. You’ll need to provide documentation supporting your claim, such as bank statements or payment receipts. Once the credit bureau investigates and verifies your claim, the error should be corrected, and your score may improve, but errors may be more common than you think, according to ABC7.
Adding it All Up
You can’t ignore your credit score – no matter how good or bad it is. As an adult, this is one of the most important metrics in your life. By knowing your score and addressing any elements that are holding you back, you can set yourself up for a life of financial success.
