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Welcome to the beginner’s guide to credit scores! We’ll go over what a credit score is, why it’s important, what a good score is, how you can improve (and build!) credit, and how you can track your credit score for free.
***Please note that this was not written by a financial expert or advisor, just an everyday human trying to manage her finances:)
Let’s start with two basic things:
1. Why are credit scores important?
Here’s the thing, credit scores are used for more than just applying for credit cards or a mortgage. Credit scores can also impact other things like your rates on your utilities, your cell phone bill, and even your insurance premiums! Having a decent score is very important if you plan on using any of these things!
2. Where do credit scores come from?
The short answer is there are 3 different credit bureaus (Equifax, Experian, and TransUnion), which gather information about your financial history and compile them into credit reports. Using these credit reports they create your credit score. (I’ll go more into detail about this later on – I promise).
HOW TO MONITOR YOUR CREDIT SCORE
Before we go into more detail about credit scores, it’s important to know what your score is currently, so you know what you need to do to improve (or build!) your credit.
My favorite website for checking my credit score for free is Credit Sesame! You can check your credit score for free each month, and it also offers free credit monitoring so you’re alerted if there are any changes to your credit report!
WHAT’S ON A CREDIT REPORT?
Okay, now you know why credit scores are important, how to check your credit score, and that your credit score is created using the information from your credit report. But what’s on your credit report exactly?
Pretty much all three credit bureaus have the same information on the credit reports:
Your credit report will have your name and any variations you use (like Jr.), your current and previous addresses, and your current employer.
ACCOUNTS & HISTORY
Your credit report will have all your revolving accounts (accounts with credit you can use over and over – like credit cards and store cards), and installment loans (like student loans and mortgages and car loans!).
And by all accounts I do mean pretty much all accounts. All open accounts will be on your credit report, and closed accounts will be on your credit report also (as long as they’re less than 7 years old).
Your payment history will also be on your credit report, but it’s usually just the last 24 months of payment history (missed payments that are older than 24 months may also show up).
Any time you do something that will cause a credit check, that credit will show up on your credit report. Like when you apply for a loan or a credit card.
PUBLIC RECORD AND COLLECTIONS
Public records are things like bankruptcy, reposessions, and foreclosures. These things will be on your credit report.
Also, accounts that are in collections will be on your credit report (like that gym membership you forgot about).
WHAT MAKES UP A CREDIT SCORE?
Your credit score is created using the information from your credit report. There can be some variation with how much weight each credit bureau puts on the criteria, but usually your credit score is made up of 5 different things:
PAYMENT HISTORY (35%)
Do you make all of your payments on time? If not, how behind are you on payments? Paying your payments on time (even if it’s just the minimum) is super important. ALWAYS MAKE YOUR PAYMENTS ON TIME!
You’ll avoid late fees this way, and you will also avoid the hit to your credit score and credit report.
AMOUNTS OWED (30%)
It’s okay to owe some money on your accounts, I mean they’re meant to be used right? But if you have a credit card with a $500 and you’re always maxing it out, well that’s a problem.
People usually say you shouldn’t use more than 30% of your available credit.
LENGTH OF CREDIT HISTORY (15%)
This isn’t as big of a deal as the amounts owed and your payment history, but it still affects your credit.
Your credit score looks at how long your accounts have been open (the average age of the accounts), and when the last time an account has been used.
CREDIT MIX (10%)
The credit bureaus will look at if you have a mix of accounts. Do you have only credit cards, or do you have an installment loan and/or retail cards?
NEW CREDIT (10%)
New credit has to do with two things: credit inquiries and how long it’s been since you opened a new account.
You don’t want to have a ton of inquiries on your credit report (a company checking your score). Inquiries remain on your credit report for 2 years.
You also don’t want to open a bunch of new accounts all at once, because this also affects your credit history length (it’ll bring down your average).
WHAT IS A GOOD CREDIT SCORE?
Check your credit score on Credit Sesame then use my handy chart above so you can see the different credit score ranges and if they’re good or not. So how do you stack up?
You don’t have to be too concerned with getting a perfect score. You can get approved for most credit cards, and get a good rate on installment loans with just a Good (700) or higher credit score.
So just aim for the Good or Excellent ranges!
HOW TO BUILD CREDIT
If you’re young you might not have a credit card or a loan, so you might not have any credit history at all! Having no credit history can be hard, especially if you want to buy a house – so it’s important that you build some good credit history.
If you have no credit at all, you will definitely have some trouble getting a credit card. There are a few ways to build credit, but here are the two things I recommend doing:
BECOMING AN AUTHORIZED USER ON YOUR PARENT’S CARD
If your parents are good with money and have made their payments on time, you can reap the rewards by becoming an authorized user on one (or more) of their credit cards.
You don’t even have to physically hold a card if it makes your parents uncomfortable, just getting added to the account and having your parents use the account like normal will be enough.
APPLYING FOR A SECURED CREDIT CARD
A secured credit card is one where you pay a deposit that will become part of your credit limit. Since it’s backed by your cash deposit you’ll be more likely to be approved since they will keep the deposit if you fail to make your payments. Capital One has a great secured card (I have one myself!).
HOW TO REPAIR CREDIT
Repairing credit can be a hard process but it can be done! And you can do it yourself (you don’t need to hire anyone to do it – I promise).
The first thing you need to do is actually know what your credit score is, and what things are dragging your score down. You can check your credit score and credit report for free using Credit Sesame.
Now you’re ready to start the repairing process.
DOUBLE-CHECK YOUR CREDIT REPORT
Mistakes happen, things can be wrong on your credit report (like a missed payment). So double check your credit report and dispute ANY and ALL errors you find.
MAKE YOUR PAYMENTS ON TIME
Since payment history is a HUGE part of your credit score, this is the #1 thing you should be paying attention to. Please make sure you start making all your payments on time from now on (if you haven’t been doing that).
BECOME DEBT FREE
The next thing you should do is begin attacking your credit card debt, since amount owed is also a huge part of your credit score.
I promise if you keep making payments on time and keep your amount owed very low, your credit score WILL go up! Just keep going!
THE LAST THINGS YOU NEED TO KNOW ABOUT CREDIT SCORES
- Getting a good credit score is a marathon, not a sprint. It involves making payments on time, keeping your amount owed low, and actually USING credit. Just keep doing what you need to do, don’t about your credit accounts, and you can get an excellent credit score!
- Remember to use Credit Sesame to keep an eye on your credit!