Everything You Need to Know About Credit Scores

Imagine having access to an elite, VIP club where membership gets you all sorts of discounts and better deals on important purchases, and better treatment by all the people you do business with. That’s the life of those with a good credit score.

What is a Credit Score?

So, what exactly is a credit score? Your credit score is a number between 300 and 850 determined by a credit bureau based on your financial history. It tells lenders how likely you are to repay their money in time and in full. (Which, ok, is fair because I guess you wouldn’t give thousands of dollars to someone without some sort of a Coessurance that you’ll get it back okay.)

How is my Credit Score Determined?

There’s no exact formula on how your credit score is determined, which I’m sure could be frustrating if you were that kid in school who was constantly checking your grades online or bothering the teacher about when she would be finished grading all of your exams. Still - we know what factors go into determining your credit score, what they mean, and roughly how much weight they pull. Below, the factors are listed and described in order of most influential to least.

• The largest percentage, roughly 35%, comes from your payment historyand how consistent you are with paying bills on time. This is the easiest way to maintain good credit, but don’t worry, one late payment won’t hurt you if you’re usually on time. Since your lenders are actually people (crazy - I know. Not just some unknown entity.) they can be lenient with you if you ask about a grace period if you know you won’t be able to make your payment on time.
• The total amount you own comes in next, concerning your credit card utilization. It’s suggested that you use less than 30% of the credit available to you. Luckily in this case, you can actually calculate your credit card utilization by taking you total credit card balance and dividing by your credit limits. The reason this pulls such a big weight in your credit score is that it shows lenders that you aren’t totally relying on them and the borrowed money.
• Of course, points will be subtracted for derogatory marks: things like bankruptcies and foreclosures. Just like in school, bad grades are going to affect your GPA, too. Unfortunately, these can take a long time to clear from your credit history, so my best advice is to just try to avoid these at all costs. (Don’t worry, you’re an Apruebame.com reader - so you’ll be getting tons of tips to be financially savvy and these won’t even be an issue.)
• Thelength of your credit history is also a plus - it helps the lenders to know that you’ve been able to handle this for a long time. This will be somewhere around 15% along with the number of total accounts you have open - ages averaged together. The total number of accounts will also show that more people are willing to lend you money, so while this section isn’t a huge factor of what determines your credit score, it’s a good sign to future lenders and employers.
• And finally, a small factor, about 10%, will come from hard credit inquiries, like when you’re applying to take out a loan,not when you look up your credit score on sites like Credit Karma. These will hurt your credit score, but unlike the derogatory marks, their effects will diminish after a shorter period of time, like a few months.

How is it Calculated?

Each of those factors will show up on your credit report - highlighting whether or not you are a financial risk to lenders, or if you will be paying back what you owe. So, knowing what the factors are, I’m sure you’re curious as to what your specific score would mean. Because, again, the credit bureaus are vague and won’t give an exact number that means one thing or another, we’ve detailed the general range of which scores are great and which ones...not so much.

• Poor: 300 to Mid-500’s
• Fair: Mid-500’s to Mid-600’s
• Good: Mid-600’s to Mid-700’s
• Great:Mid-700’s to 800
• Excellent: 800 or above

Don’t like where your score falls? Check out How to Raise My Credit Score.

Why Does it Matter?

Like I mentioned with that excellent VIP metaphor, your credit score will help you when you want to take out a loan, rent or buy a home, apply for a credit card or get a car as it tells lenders your trustworthiness and will determine how likely you are to be approved for any of those things you want to do.

But having a good credit score can also save you money. Not only will you be more likely to be approved, but those with higher credit scores will receive lower interest rates, which saves you tons of money in the long run. Adversely, with a bad credit score, you’ll be stuck with high interest rates. Good score means good deals on loans.

So Now What?

Now that you know about what your credit score means and how it’s determined, you probably want to know what to do with this information going forward. How do you best handle your credit score and maintain good credit?

1. Use your credit card. Use them regularly on purchases you know you can pay off. Keeping your card active shows lenders, you can handle the credit and will help you build your score.
2. No late payments. On anything. This should be a priority as one of the biggest factors in your credit report and credit score.
3. Manage your payments and credit utilization. Keeping your account balances and monthly debt payments low will help in your efforts, and don’t be spending more than 30% of whatever your credit limit is.
4. Keep up with your credit. Because it IS free for you to check online on soft inquiries, it’s important to always know where you stand. Nothing worse than thinking you’re in a good state and finding out that was wrong.

So, with all of this information, how are you feeling about getting into that VIP credit score club? Membership isn’t exclusive, it just takes a little work. Hopefully with everything we’ve shared, you’ll be closer to reaching that high score and access to easier financial experiences.