Ever wonder what exactly is a credit score? What even makes up your credit score? And, even more importantly, exactly what impacts your score has on your finances and why?
Basically, a credit score is nothing more than a simple three digit number that credit bureaus use to determine your credit worthiness, but depending on what your actual score is, it can have a huge impact on your finances, including not just the amount of money you can conceivably borrow and the interest rates you’ll have to pay for credit cards, car loans, and even mortgage loans, but also on the type of job you may or may not get, and even the rates you’ll be charged for car insurance, homeowner’s insurance, and so much more.
That’s why it’s so important to not just know your credit score, but to improve your score if it is not as high as you need it to be.
What makes up your credit score?
Although there are lots of places that provide consumer credit scores, most of them are not actually used by lenders to assess your credit worthiness. Financial institutions actually rely on two major credit scores, your FICO score and your VantageScore, when deciding if you’re eligible for a loan. VantageScore and FICO credit scores range from 300 to 850. The higher the number, the better your credit rating.
Here are the ranges for both:
- 800 to 850: Exceptional
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Very poor
- 750 to 850: Excellent
- 700 to 749: Good
- 650 to 699: Fair
- 550 to 649: Poor
- 300 to 549: Very poor
Your credit scores are actually based on elements of your credit history, and once again, the two are different:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit: 10 percent
- Credit mix: 10 percent
- Amount of recent credit: 30 percent
- Payment history: 28 percent
- Use of your current credit: 23 percent
- Size of account balances: 9 percent
- Depth of credit: 9 percent
- Amount of available credit: 1 percent
How important is a good credit score?
Since your credit score affects so many aspects of your life, it only makes good sense to monitor your credit report and strive to keep your credit score as high as possible. The higher your score, the easier it is to qualify for a mortgage, buy a car, or get any kind of credit (and the better the interest rate you’ll ultimately pay).
It also may make it easier to get a job, as some employers check your credit, and even some regulatory agencies refuse to license professionals with a poor credit score, so the penalty for poor credit can affect more than just your financial life.
What if you need to improve your score?
The way in which you use loans and pay debts has a significant impact on your credit score. You have plenty of opportunities to improve your score, but you should know, it takes time to improve your credit score, so plan ahead and start working on your credit history now.
Here are a few simple things that you can do right now:
- Pay your bills on time, every time. Even one late payment can have a significant effect on your credit score.
- Pay down the balance on your credit cards and keep them at or below 30% of the total available credit on each card.
- Pay off the cards that have small balances as soon as you can, and then, if you use your cards regularly, try to use only one card. Just remember to keep the balance below the 30% threshold!
- Sign up for one of the many free credit score providers, like Credit Sesame, and continuously monitor your score. You’d be amazed at how raising your score by just a few points will make you feel!