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How to Understand Your Credit Score

Does My Credit Score Really Matter?

Did you know you have not one credit score, but multiple credit scores? And here’s another surprise: Credit scores don’t just impact your financial world -- they actually affect much more in your life. If you are looking to understand your credit score, we’ve got the scoop.

Your credit score is calculated based on the information contained in your credit report. You actually have 3 credit reports -- one from each of the credit scoring bureaus, Equifax, Experian and TransUnion. While there are multiple different credit scores out there, the most commonly used credit score is a number between 350 and 850 that evaluates your risk as a borrower. A software company in the financial services industry called FICO is the best source for your credit score — known simply as your FICO score. In addition to your FICO score, each credit bureau may have their own proprietary scores on you that reflect how well you handle financial obligations.

Any time you apply for credit (such as a credit card, loan, mortgage), the lender will pull a credit score to determine the risk they would undertake to loan you money. If your credit is too low, you risk being unable to secure credit at all. If it’s on the lower side, you may get the credit you want, but at a much higher interest rate to offset the risk. The highest credit scores allow you to have the best options when obtaining credit -- including better terms and lower interest rates.

It’s not just potential creditors that get your score, however. It’s possible to have your score evaluated by potential employers, landlords, utility companies and more. Even auto and homeowners insurance companies may consider your credit score when calculating what you pay in premiums, according to Consumer Reports.  In plain terms -- your credit score matters.

What is a Good Credit Score?

Are you confused about what constitutes a good or bad credit score? Here’s a basic rule of thumb for your FICO score (FICO is the most commonly used scoring model): Scoring above 700 on the FICO scale is like getting a B+ in school. A FICO score of between 760 and 850 is like being a straight A student! People who have that kind of score are highly sought after by lenders because they know someone with a high score is likely to repay their debts on time as agreed. A grade of “C” would put you in the 650-699 range. A score between 600 -- 650 is going to put you in the “D” category, and anything below 600 is pretty much a failing credit score grade.

What Makes a Credit Score Low?

Issues such as late payments on your creditor accounts can make it difficult to keep your score healthy. Every time you pay an account more than 30 days late, your creditor can report it to the credit agencies, which may quickly be reflected in your credit score. Items like collection accounts, bankruptcies, debt settlements, judgements, and liens can also impact your credit score significantly.

 How Do I Maintain a Good Credit Score?

Here are the three ways you can maintain a good credit score:

  1. Pay every bill on time every month. This is the number one factor that helps or hurts your credit score, and it alone accounts for 35% of your credit score in the FICO scoring model.
  2. Don’t use too much of your available credit. Keep your credit utilization rate at or below 30% of your available credit. This accounts for another 30% of your overall credit score. Here’s a real life example: Let’s say you have two credit cards with a total credit line of $10,000 between them. Aim to use less than $3,000 of that credit — which is 30% of your total credit line in this example. It doesn’t matter whether you only have $500 on one and $2,500 on the other, or whether you have a zero balance on one and $3,000 charged up on another. What matters is the total amount of your available credit you use.
  3. Avoid closing a credit account when you pay it off in full. Showing responsible management of credit over time accounts for 15% of your overall credit score.

Taken together, these three factors alone account for a 80% of your credit scores. They are by far the most important factors to consider when you want good credit. The rest of what makes up your credit scores is about what types of credit — such as car loan, mortgage, store credit cards, etc. — make up your credit mix (10%); and how quickly you take on new credit in your life (10%).

If you are experiencing financial difficulty and are looking for a solution, non-profit credit counseling can help you make sense of all your options. Contact us today for a free financial assessment with one of our certified credit counselors.



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