The Basics
What is credit?
Credit is the record of a person's history of borrowing money and repaying at a later date. If trust is a bank account then credit would be the currency. Lenders, such as banks, car dealerships, and credit card companies use credit scores to evaluate the potential risk posed by lending money to an individual.
Why do I need credit?
Having good credit can go much farther than just banking relationships. Credit scores are often pulled by insurance and utility companies, employers, and landlords. A good credit score will help ensure you have access to credit when you need it.
The Score
What is a good score?
Scores range from 300 - 850 and a credit score of 700 or above is generally considered good. A score of 800 or above is considered to be excellent. Most credit scores fall between 600 and 750.
How do I find out what my credit score is?
While you are able to get a credit report pulled from each credit reporting agencies once a year, it may not include a credit score. TransUnion and Experian offer this information at no charge with your report while Equifax charges a fee to get all 3 scores at once.
What makes up credit?
Credit is calculated with 5 different factors; payment history, amounts owed, length of credit history, new credit, and credit mix.
1. Payment History
Payment history accounts for 35% of your credit score. Payment history answers the question "Do you pay your bills on time?".
2. Amounts Owed
Amounts Owed accounts for 30% of your credit score. This is also called credit utilization and compares what you already owe to your maximum credit limits. In short, the more you already owe the riskier it may be to take on new debt.
3. Length of Credit History
Length of Credit History accounts for 15% of your credit score. The longer the credit history, the more information that is available to show you are a reliable borrower.
4. New Credit
New Credit accounts for 10% of your credit score. This looks at new credit accounts opened over a period of time. If there is a large amount of new credit accounts opened in a short period of time it may adversely impact your score.
5. Credit Mix
Credit Mix accounts for 10% of your score. Having mixed credit means you have different types of debt which shows you have experience managing a variety of repayment terms. Examples include mortgages, car loans, credit cards, and student loans.
Tips for Improving Credit
The first place to start is to obtain a copy of your credit report. From there you can start building an action plan to make improvements.
Review your Report
Look for errors in the report that could be adversely impacting your score. If there are errors, contact the credit bureaus to file a dispute.
If you would like to file a dispute visit:
Avoid Late Payments
Avoiding late payments helps improve the payment history part of your score. If you have trouble making payments on time, set up alerts so you know when a bill is due.
Pay Down Balances
Keeping your credit card balance low helps with the credit utilization part of your score. This is because it improves the ratio of the amount of credit available to you. To do this try to pay off the full balance each month or aim to get the total outstanding balances at 30% or less of the total credit limit and work on paying them down.
Keep Old Accounts Open
If you have old credit cards in your wallet, that's ok, keep them open. They are actually helping your credit score. By having these older cards open it is improving your credit utilization ratio. By closing these cards it would decrease the amount of credit available to you and will make the credit utilization ratio higher.
Alerts for High Balances
If you are having trouble keeping track of your credit utilization, set up high balance alerts with your credit card company.
Limit Applying for New Accounts
While getting a credit card can increase your credit utilization, applying for a number of them in a short period of time can hurt your credit score.
Prepared for informational purposes only.