What is a credit score? – Education
It can seem a little esoteric: this three digit number, concocted by people who you’ve never met, can affect every area of your life from home purchase plans to what cell phone plan your carrier offers you.
What is a credit score?
The most commonly used credit score is your FICO score, a three digit rating that goes from 300 to 850 points. Higher is, of course, better. Most experts agree that a FICO score of 750 or better will get you the best rates on credit and insurance. The FICO score is based on reports from the three major credit bureaus: Equifax, TransUnion and Experian. Each reporting agency has its own internal scoring system, as well, but FICO is what most people mean when they talk about their credit score.
What Affects Your Credit Score?
The are five factors that affect your score. Some are considered more important than others, and affect your score more heavily:
- Payment history (35% of your score). This is the most important. Do you have a history of paying your bills on time?
- Amount owed (30% of your score). How much you owe on accounts like credit cards is a big factor. Using only small amounts of your available credit raises your score.
- Length of credit history (15% of your score). The longer the history, the higher your score.
- New credit inquiries (10% of your score). How recently have you looked for new credit? If you look often, it can lower your score, because it can signal that you might be trying to live beyond your means.
- Types of credit (10% of your score). Potential creditors want to see a mix. Do you have revolving accounts like credit cards? How about an installment loan such as a car payment? The more types, the more confident they are of your ability to handle credit.
What Are Some Ways to Increase Your Credit Score?
Going through credit repair to resolve the negatives on your reports will significantly increase your FICO score. This process helps remove unjustified negative entries that were bringing down your score.
If you do not yet have a credit card, attaining one can help you increase your score. Secured credit cards are easier to get if you have bad credit. Use the card and pay it off regularly to begin building a credit history.
Paying down debt is another way to increase your score. Financial advisor Dave Ramsey recommends what he calls the “snowball” method: apply payments to one debt at a time to eliminate it from your record and rebuild your credit score. With time and persistence, even those with poor credit can bounce back.
Avoiding a balance on credit cards also boosts your score. If you are near your limits on every card, creditors can decide that you are living beyond your means. Many advisors recommend using no more than 10% of your available credit at any time and paying off every card in full every month.
Credit scores can be intimidating. But, with a little education and planning, you can stop them from being a hurdle and make them work for you.