Everything You Wanted to Know About Credit Scores
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Every month when I check in on my money, I review my credit score. Over the last few years, I have worked hard to improve my score. Once I understood how credit scores work, I could make the right moves and change my situation. Ironically while writing this post I received an email from Wallethub about my credit score.
This post will discuss the following about credit scores:
1. What is a Credit Score
2. Factors that Determine Your Credit Score
3. Factors That Have No Effect On Your Credit Score
3. How to Obtain Your Credit Score
4. Actions You Can Take to Increase Your Credit Score
5. Importance Of Having A Good Credit Score
Hopefully, this post will set the record straight and give tips and tricks to help you increase your credit score. Let’s dive in!
What Is a Credit Score
A credit score is a three-digit number that informs banks of your ability to manage credit and debt. Experian, Equifax, and Transunion are the three different credit reporting agencies that determine your credit score. Since each company has its system for determining your credit score, your credit score may differ among the three agencies.
Credit scores can range from 300 – 850.
| Category | Score Range |
| Poor | 300 – 578 |
| Fair | 579-669 |
| Good | 670-739 |
| Very Good | 740-799 |
| Excellent | 800-850 |
According to CNBC, only 1.6% of people have a perfect 850 credit score.
Factors that Determine Your Credit Score
Five factors determine your credit score. These factors are
Payment History
The first and most important factor is payment history. Payment history makes up 35% of your credit score. Each month banks, credit cards, mortgage companies, etc. report to the credit reporting agencies the payments that were made to our accounts.
If the payment is not made on time, a late payment will be reported. Having just one late payment reported can significantly drop your credit score.
Credit Utilization
The second most important factor is credit utilization. Credit utilization makes up 30% of your credit score. Your credit utilization is calculated by dividing the current balance on a credit account by the total credit limit available on this account.
| Credit Account | Balance | Credit Limit | Credit Utilization Rate |
| JCPenney Credit Card | $0 | $3,000 | 0% |
| Old Navy Credit Card | $0 | $5,000 | 0% |
| Visa Credit Card | $800 | $10,000 | 8% |
| American Express Credit Card | $2,000 | $10,000 | 20% |
| Cards Combined | $2800 | $28,000 | 10% |
Your combined credit utilization rate for these five accounts is 10%. Even the cards with a zero-dollar balance factor into your credit utilization rate. The goal should be to keep your credit utilization rate below 10%.
Credit Length
The third most important factor is credit length. This factor makes up 15% of your credit score. Every time you open a new credit account, this account is added to your credit file. The longer you keep an account open, the length of your credit history will grow.
Closing old accounts will cause a drop in your score because that history will be removed from your credit file. The closing of an account will also remove the available credit limit from your credit file and your credit utilization rate will be affected.
Paying off some accounts will cause the closure of the account. These accounts include student loans, car loans, and mortgages. Your credit score will drop when this happens, but I would not be concerned. The payoff of these accounts will look favorably on your credit score and your score will increase again in time.
Finally, there is a possibility of a credit card company closing your account because you have not used a credit card for an extended period. Usually, you will receive a letter in the mail from the company letting you know that the company plans to take this action. I would suggest making a small purchase on this account so that this credit history will not be removed from your credit file.
You could also set up a monthly subscription on these lesser-used accounts so that you don’t have to worry about these accounts being closed before you had a chance to stop it from happening.
Credit Inquiries
The fourth factor is credit inquiries. This factor makes up 10 percent of your credit score. Every time you apply for credit, your credit file is pulled by the bank so they can determine if your application should be approved. The pulling of your credit is called an inquiry. Credit inquiries stay on your credit file for two years. The longer a credit inquiry is on file, the less impact it will have on your credit.
Having multiple credit inquiries on your file over two years will cause your score to drop. Since this credit factor only makes up 10 percent of your score the drop should be minimal.
Credit Mix
The fifth and final factor is the credit mix. Credit mix makes up 10 percent of your credit score. Credit mix is evaluating if your credit file includes different types of credit. The different types of credit include installment loans and revolving credit. Installment Loans are accounts that have a fixed end date and a regular monthly payment. For example, when you finance a car, you agree to make a payment of $400 a month for 60 months. Other examples of installment loans are mortgages, student loans, and personal loans.
Revolving credit requires a minimum monthly payment. An example of revolving credit is credit cards. For example, your VISA credit card has a balance of $800 but the minimum monthly payment is $40.00. Having a mix of both installment loans and revolving credit on your credit file looks good to the credit reporting agencies and will have a positive impact on your credit score.
Factors That Have No Effect On Your Credit Score
The following information is not reported to the credit reporting agencies and does not determine your credit score:
How to Obtain Your Credit Score
If you have a bank account or a credit card you have access to your credit score. Most banks offer credit scores to their customers for free. This information is usually available online on the bank or credit card company’s website and/or mobile app. Barclays, Chase, Capital One, Citibank, Discover, and Wells Fargo are all companies that provide credit scores. Along with providing you with your credit score, suggestions are usually given on how to improve your score.
You can also get your credit score from free services like Credit Karma, Credit Sesame, Lending Tree, and Wallethub.
Finally, you can get your credit score directly from credit reporting agencies. Experian provides their credit score free on their website. Equifax and Transunion charge a monthly fee to obtain access to your credit score.
Action Steps You Can Take to Improve Your Credit Score
What Credit Score Should You Have and the Importance Of Having A Good Credit Score
It would be best if you aimed to have a credit score over 740. The first reason you should aim to have a good credit score is that you will increase your chances of being approved for new credit. No one wants to be in the situation of submitting a credit card application or attempting to obtain a mortgage and being denied by the bank. A good credit score will give you the confidence to apply for that mortgage or auto loan.
The second reason you should aim to have a good credit score is that you will receive the best interest rates. The lower your credit score the higher the interest rate you will be quoted by the lender. This higher interest rate will cost you more in the end because you will pay more back in interest charges.
Finally, your credit score is reviewed when applying for jobs and submitting rental applications. Landlords and employers want to know that you can make on-time payments and can manage credit and debt.
Final Thoughts
Hopefully, this article gave you a better understanding of credit scores and how you can improve your score. Take action today to work on improving your credit score. I was able to do it and I believe you can do it too. If this post was helpful to you, please share this article with family members and friends.
Elevated Life and Money Plan by Nakeshia
