What Is A Credit Score & Why Do I Need One?

 

   Your credit score, or FICO score (Fair Isaac Corporation) is a three digit number that shows your creditworthiness. This is important because depending on the number you have, ranging from 300 to 850, it can say a lot about whether a lender sees you as someone that is safe to invest in or not. The higher your credit score, the more likely chance you have at being approved for things like mortgages, car loans, business loans, or any big loans in general. Low credit scores can make this challenging for you as it looks like you’re not very good at paying off your loans, which makes you a higher risk for lenders to invest in you. 

What’s a good credit score though? 

Excellent: 720-850 

Good: 690-719

Fair: 630-689

Bad: 300-629

      Typically, the better your credit score, the better the rates that you can get on interest or longer the loan amount you can be approved for. 

       Your credit score is typically calculated by five factors:

1. Payment History: 

       This accounts for about 35% of your credit score. This is where they check to see how often you paid your payments on time and without any late fees or issues.  The bigger the payment you’re required to make each month, (the bigger the loan you’re paying off) the more important this is. If you’re paying off a small loan every month but making late payments on a much bigger loan, (say paying off a small purchase on a credit card versus paying off a car loan or a house mortgage), this will have significantly more impact on your credit. So paying on time is important to having a good credit score. 

2. Amounts Owed: 

       This accounts for about 30% of your credit score. This is where the lenders check to see how much money you owe and how you’re doing financially. For example, are you maxing out your credit cards, or are you using a reasonable amount each month. Typically, lenders like to see that you are using about 30% of your available credit. It’s a sign of your ability to live within your means. Maxing out your credit cards every month and paying off the minimum payment every month won’t necessarily make your score bad, but for optimal benefits, it’s better to use less than what you’re approved of, and show how responsible you are with your money. 

3. Length Of Credit History: 

     This accounts for about 15% of your credit score, and isn’t something to turn your head at either. Unfortunately, if you’re young and just starting out with building your credit, there’s not much you can do about it. You just have to be patient and build up a good score. This accounts for your longevity with debt responsibility, where lenders check to see how long you’ve stuck with certain companies, how long you’ve been good with paying off debts, and how trustworthy you are with money in the long run.

Typically, this part of the score goes up the longer you have credit. So if you’re just trying to build up your credit, you can’t really go back in time and open up an account earlier than before, so you just have wait it out. Keep your older accounts open longer to establish your responsibility, because once you close an account, you lose the payment  information that you have built up over time in that specific account. 

4. Credit Mix

       This accounts for about 10% of your credit score. This is where you have a variety of credit such as installment credit like car loans, mortgage loans, etc., or revolving credit like credit cards. Having both kinds of credit can be very beneficial to boosting your score, but isn’t completely necessary. You can get a good credit score with only one kind of credit. But for boosting your credit quickly and making a good impact with it, it can be helpful to have a balance. This does not mean that you need to go out and apply for a bunch of credit loans though.

Remember the second thing I listed; keeping your credit manageable and low is another factor in your credit score. Think of it like having a diverse portfolio of stocks, bonds, REITs, and commodities. The more diverse your portfolio, the better chance you have. 

5. New Credit

       This accounts for about 10% of your credit score. This is where they check to see how often you are applying for new credit. If you are going for several new credit cards or new loans all at the same time, your credit score can actually take a hit and it makes you look like a risky investment.

To some extent, this might not be able to be helped. Say you have to open a new card for whatever reason or you have to size up to a minivan for a growing family, or you need to open a new account to pay for new tires on your car or a new stove after your last one burned up. The big point is to not open tons of accounts all at once, and to think about the options you have before you add to your accounts. Too many inquiries for new credit can lower your credit score, and you don’t want that. 

Why Is It Important? 

      You want to have a good credit score for several reasons. If you have a low or bad credit score, you will look more risky to lenders like banks or other companies and you might not get approved for a loan that you needed. If you have a low credit score and you do manage to get approved for a loan, you’re going to pay a much higher interest rate on your loan and you will have far higher insurance rates too.

Employers also check your credit score sometimes to see if you’re a good fit for their company. (Especially if you’re applying for a position that is in any authority over the company’s financials.) So if you have a bad credit score, you might miss out on some job opportunties as well. 

       You will also have a hard time getting an apartment for rent as well because the landlords will look over your credit score to see how responsible you are and if you will pay them on time for rent. (If you’re late for your monthly loan payments, what insurance do they have you would handle rent differently?)

The other thing to keep in mind as well, is that when you’re paying higher interest rates and higher insurance rates as well as being unable to qualify for good jobs, all of this can have an impact on your savings as well, and then you will have a much harder time getting ahead in life and saving for retirement. So you can see why this is important to get figured out early on. 

How Do I Boost My Credit Score? 

      Good question, I’m glad you asked. There are several efficient ways to build your credit score. First; it’s important to pay your bills on time everytime. No late payments. Pay at least the minium payment on time, every time. Do I need to say it again? No? Okay. That’s step one. The entire point is showing that you will responsibly pay back any loans you take out, so it makes logical sense that you need to pay when you’re supposed to.  

       Increasing your credit line can be beneficial too. Remember when I said that the percentage of credit you use every month can affect your credit score? If you can’t manage to go with less credit than you already have, but you’re using more than 30% of your approved credit, you can always call up your bank or one of the credit companies and ask them to approve you for more credit. If they agree to do this, then without you spending any more money, you have raised the amount of credit you’re approved of. Say you’re given $10,000 of approved credit, and you’re using $4,000, you’re already over your 30%.

But if you call the bank and ask them to approve you for more credit and they do, say they raise your credit to $15,000, you still owe $4,000, but you have more credit allowed. So instead of being at 40% of your approved credit, you’re now down to 26%. See how that works?  

         Also, don’t close all of your accounts. If you have a credit card that you don’t use anymore, but you may have had it for a long time,  you can actually hurt your credit score by closing down that account, because you lose all of that payment information that you built up over those years. It’s better to just not use that credit card, rather than to close the account. 

          It’s also a good idea to periodically check on your score and fix any errors. If someone has been mistakenly put on your account and they just happened to have the same name or a similar name, that can affect your credit if they’re not very responsible. Making sure that all of your information is correct and any inquiries that you did not initiate are checked on and corrected if they are wrong, and any purchases that you did not authorize are fixed.

All of these things can affect your credit score and might need to be corrected. So it’s important to check on your credit reports periodically to make sure that all of the information is correct. Doing all of these things can help boost and keep your credit score healthy, which will in turn give you better advantages for getting ahead in life and taking more control of your money. So make sure to do them!

Don’t know your cedit score? You can check it here: https://www.myfico.com/products/fico-blp?utm_medium=cpc&utm_source=bing&utm_campaign=361660619&utm_content=73736305436182&utm_adgroup=1179776887676663&utm_term=your%20credit%20score&utm_type=e&utm_device=c&msclkid=b65ebf68e2251513060bd949bab2d1ba

You can read more about the credit score and how to utilize credit to your advantage in my book “Your Simple Guide To Money Mastery” here: https://a.co/d/bWJYHOV