Credit scores can seem like a complicated topic for many, but I’d like to eliminate some of the confusion surrounding them. Credit scores aren’t as complex as people see them, and there are tons of ticks and trips you can use to build yours up.
Of course, Credit scores can impact just about every aspect of your personal finances. A good score is great and makes life a lot easier. For example, a good credit score makes it easier to rent a house or apartment, buy a car, get a mortgage, and so on. Whether you’re a young adult and trying to get started, have average credit, or have some issues in your credit history, there are many ways to work on improving your score!
Why Do I Care About Having A Good Credit Score?
As I alluded to earlier, a good credit score makes it much easier to get approved if you’re trying to rent a house, but it also gives you better interest rates for your insurance, mortgage, and credit cards. On top of that, many services give you access to better options when you have a good credit score – like credit cards, for example. Access to the top rewards (cash back, travel perks, points, etc.) are heavily dependent on your score.
In short, a good credit score makes it far easier to get loans in general, get good interest rates on those loans, and it gives you access to nifty perks. On top of that, building a good credit score is fairly easy and simply rewards behaviors that you should want to do anyway.
What Is Actually A Good Or Bad Credit Score?
Credit scores can be any number between 300 and 850. There are various systems for scoring credit, but in this article I’m going to focus on FICO since that seems to be the most common and “standard” system in my experience. Another good thing to know is that different credit bureaus might have somewhat different scores, which happens because they may have access to slightly different credit history information. If you live in the USA, you’ve likely heard of TransUnion, Equifax, and Experian – the 3 major credit bureaus.
The consensus is the following:
- <580 is poor
- 580-669 is fair
- 670-739 is good
- 740-799 is very good
- 800+ is exceptional
Often, once you have a credit score around 700 or higher, you’ll have access to a lot of the better interest rates and credit card perks. The average American will probably not notice a significant difference in the rates they can get with a credit score between 750 and 800, and any difference between 800 and higher is likely completely negligible. So, if you already have a score of 750, you can rest easy knowing you probably aren’t missing out on much. If you fall into the poor or fair categories, you may want to prioritize improving your credit score. At those tiers, it can limit some of the options you have for your personal finance decisions.
How Is My Score Calculated?
Again, for the purposes of this article I’m going to be focusing on FICO scores since that is the most popular one.
The following are the primary ways your score will be calculated:
- Your payment history (i.e. being on time and not having outstanding payments) is responsible for 35% of your score
- The total amount you owe counts for 30% of your score, so using less of your available credit is better
- The overall length of your credit history (the longer you’ve had credit, the better) is about 15% of your score
- New credit counts for 10% of your score, which is basically just how many accounts you’ve opened recently. Opening tons of accounts in a relatively short period can be seen as a high-risk behavior by credit bureaus
- Lastly, credit mix is another 10% of the FICO score. This generally means that they like to see a mix of different types of credits and loans. For example, having a credit card and a mortgage MAY be seen as better than just having two credit cards
How Do I Check My Credit Score?
Don’t worry, checking your credit score shouldn’t hurt it. Many credit card companies and some banks offer ways for customers to check their scores easily. If you don’t have access to that, or want another source for your credit score, I highly recommend using myFICO to check and monitor it. For more information, check out the following graphic that Say Insurance was kind enough to provide!
Infographic by Say Insurance
How Do I Get Started On Improving My Credit Score?
If you have no history, it won’t happen immediately. You need to show consistent low-risk behavior (i.e. responsible behavior) on your credit history. The easiest way to start is by paying all bills on time and limiting the total amount of credit you’re using. It should also be easy to find credit cards specifically for students or those with low credit scores to help them boost their credit.
It’s important to remember a few key tips:
- Use as little of your available credit as possible
- Pay bills on time (and don’t keep a balance on credit cards)
- Don’t open too many accounts at once – and avoid tons of hard inquiries (e.g. shopping around for a lender on a mortgage)
- Stay consistent
- If you’re young or have a limited credit history, avoid closing your older accounts if possible
- Bankruptcy should always be a last resort. If you’re in a bad situation it can help you, but it will hit your credit score incredibly hard
- Like bankruptcy, foreclosures will destroy your good credit. It’s definitely something to avoid
Conclusion
Credit scores are a big deal and can make your life a lot easier or a lot harder. The downside is that it takes time to build up a solid credit score. The positive side is that it is pretty easy and straightforward to start building or fixing your credit. How your score is calculated is laid out neatly, and it is incredibly easy to keep an eye on your credit score these days.
If you have a poor or fair score, focus on increasing it. Once you’ve reached 750 or higher, you’ve done great! If you have any tips for everyone else, leave them in the comments below. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
