A Guide to Understanding Your Credit Score

Your credit score is the key to borrowing money. If you plan on taking out a loan through a traditional lender, such as a bank or credit union, then you should be paying close attention to this little number.

CREDIT SCORE

a numerical value assigned to represent your creditworthiness, or the likelihood of debt repayment, based on an analysis of your personal credit history and current credit accounts.

Consumer Financial Protection Bureau

Credit scores usually range between 300 and 850, with higher values indicating better credit. The objective of building and maintaining good credit is to have greater access to quality loans with the best terms and interest rates. Honestly, who really wants to throw away money on interest payments instead of pocketing it?

Components of a Credit Score

FICO and VantageScore are two of the most well-known scoring companies. Credit scores are calculated from data compiled by credit bureaus, such as Equifax, Experian, and TransUnion. While there are several factors that impact your score, the main components that determine your rating are:

• Payment History: Have you paid your past bills on time? Payment history accounts for how often you miss payments, how late you submit payment, and how recently you’ve missed payments. Each time you miss a payment, your credit score is negatively impacted.
• Amount Owed: How much of your credit are you currently using? Credit bureaus examine the total amount you owe compared to the amount of credit available to you. The higher the number, the greater the lender’s risk. You should maintain a lower percentage of credit use for a better credit rating.
• Credit Age: How long have you had credit to your name? The longer your credit history, the better your standing. Try not to close old credit card accounts unless they have high annual fees and you no longer use them.
• Credit Diversity: What kinds of credit do you have? Responsibly carrying revolving credit, such as credit cards, in addition to student loans, car loans, or mortgages, allows lenders to see that you are capable of handling different types of debt.
• New Credit Applications: When you apply for new credit, lenders perform a ‘hard’ credit check on your report, which lowers your score a few points. Lenders can see credit applications up to 2 years prior, even if you were denied for the line of credit. It’s important to research the eligibility requirements of each line of credit you intend to apply for since your credit is affected by each application.

Credit Score Ranges

A good credit score typically ranks around 700. To access more loan options with better terms, you should hold a good credit score at the very least. For the best terms and interest rates, aim for an excellent credit score.

Once you’ve established credit, keep in mind the components that contribute to your credit score. Remaining aware, prepared, and disciplined will help guide you towards a strong credit standing. An excellent credit score, in conjunction with your income, debt, and other assets, can qualify you for:

• Financing at 0% interest for certain products or services
• Negotiating power on loans
• Quicker loan approval with low interest rates
• Access to top-notch credit card rewards (including our favorite travel credit card!)
• Better car and home insurance rates
• Higher credit card and loan limits
• Securing certain types of employment
• Greater access to both private and public loans
• Better chances of securing a rental property
• …and more

An excellent credit score grants you the opportunity to build a life with someone else’s money legally and inexpensively.

Best Practices for Building & Sustaining Good Credit

Start building credit as early as you can. Whether your family helped encourage financial independence at an early age or you’re navigating finances for the first time as an adult, it’s important to understand credit basics before you start borrowing money.

4 Simple Ways to Build Credit

1. Become an Authorized User
Hopping onto a willing family member or friend’s credit card account can kick-start your credit journey. Just make sure they have good credit, first!

2. Apply for a Secured Credit Card
A secured credit card requires a cash deposit, which becomes your line of credit. It operates like a debit card, though it actually counts toward your credit history.

3. Open a Traditional/Student Credit Card
Responsibly using a starter credit card with a low limit is a common way to start building credit.

4. Take Out a Loan
A student or auto loan might be necessary for you as you consider your future. Do your research for the best options. Be practical and responsible in your review and application. Another loan option to consider is a credit-builder loan, which requires you to pre-pay according to the lender’s terms before receiving access to the loan. Most loans allow you to receive the full loan upfront, whereas a credit-builder loan holds your payments in a separate account to be accessed at the end of the loan’s term.

These simple ways can get your foot in the door of credit-building. There is no need to tick off every single one of these options. Choose one or two to begin with to get a feel for your limits.

Good Habits for Good Credit

Now that you’re on the way to building credit, it’s important to create good habits to sustain a good credit rating.

• Pay your bills on time, every time
• Pay off your monthly credit card balance in full (unless you have 0% APR)
• Avoid high credit utilization; you should aim to use less than 30% of the credit available to you
• Keep your old accounts open (unless they have high annual fees) even if you rarely use them. Charge small amounts to them to keep them active.
• Don’t apply for unnecessary credit
• Limit credit applications between 14 and 45 days (depending on the scoring model)
• Maintain a healthy credit mix with different credit card accounts and loans

You will find that creating good financial habits in relation to your credit standing will open more doors in your financial future. As long as you commit to good financial habits and work to sustain a good credit score, you should be able to reach an excellent standing in no time.

Check & Monitor Your Credit

Although hard credit checks performed by lenders can lower your credit score, did you know that you can check on your own credit without hurting your rating?

Credit monitoring keeps you informed of your overall financial health. It helps protect against identity theft and allows you to identify potential errors.

Though there are plenty of companies you can pay for access to your credit report and credit score, you can actually access this information for free on your own. The three major credit bureaus, Equifax, Experian, and TransUnion, are legally mandated to provide you with one free credit report each year.

**Note: All 3 bureaus are currently offering free access once a week during the COVID-19 pandemic.

Additionally, there are other free services available that offer a broader overview of your credit report. Check your credit through any of the following options:

• Annual Credit Report: One free annual report each from Equifax, Experian, and TransUnion
• Experian: Access your FICO score and Experian credit report (updated monthly)
• Credit Karma: Credit reports and VantageScore from TransUnion and Equifax reports
• Credit Sesame: Credit report card with data from TransUnion credit reports
• NerdWallet: Credit report and VantageScore using data provided by TransUnion
• Consumer Credit Bureaus: If you’re a credit cardholder, you potentially have free access to your FICO or VantageScore through your credit card’s online portal. Some credit bureaus actually provide free scores beyond their cardholders, such as American Express and Chase.

Brian and I pull our credit reports from annualcreditreport.com. We check our credit scores through Chase and Discover and also use Credit Karma for credit monitoring. Credit Karma is very easy to navigate; it provides a clean breakdown of open accounts, as well as great suggestions for alternative credit services.

Build Your Future

Being cognizant of your financial standing, including your credit score, allows you to set a plan in motion to gauge and improve your creditworthiness. This three-digit number is one of the most powerful tools you can use to build your own future.

Do you believe that being able to invest in your own future is better than being controlled by someone else’s terms? How do you plan to use credit for your future?