CREDIT SCORE 101 | WHAT YOU NEED TO KNOW
August 01, 2019
When it comes to credit score many of us are on a need to know basis- you don't know until you need to know. The problem of this is that you will find yourself with either poor credit or racing to fix it or get it up. So, what is the best thing to do when you only know that "you need good credit" but "have NO idea of how to get it or even what it is"?
You keep score of the only score that actually matters... your Credit Score.
THE BASICS OF YOUR CREDIT SCORE- WHAT YOU NEED TO KNOW
What is a credit score?
-A three-digit number between 300-850 that lenders (banks) use to decide how likely you are to repay your debt. This information is based on your credit report.What is a credit report?
- A report that tells all of your credit histories, due dates, and amount owed. It also tells your credit age as recorded by the 3 major bureaus in the United States.- TransUnion
- Equifax
- Experian
What is a credit score used for?
-Mesures your risk level to lenders-Tells your credit/payment history
-the higher the score (less risky you are) the lower interest rates will be
-It tells lenders if you will pay them back or not.
What type of information is on my Credit Report?
-Identity information- (Name, SSN, Addresses, DOB, employers names, etc).-Credit Information- Open/Close dates, credit limits, loan amounts, balances, monthly payments, payment history.
-Accounts in collections.
-Public record information- such as bankruptcies, foreclosures, tax liens, etc
-Inquires- Name of companies where you've applied for credit/loan.
How is Your Credit Score calculated? What affects it?*
- 35% is Payment History- the number of times you pay on time or missed a payment on each account.
- 30% is credit utilization- the amount owed on accounts/how much of your limit you are using.
- 15% is the length of credit history- how long have your accounts have been open.
- 10% is the type of credit- the mix of your credit (student loans, auto loans, credit cards, retail accounts, etc.)
- 10% is new credit- how many new accounts have you opened or tried to open.
* https://ficoscore.com/education/#WhatYour
How do you fix it or create a Credit Score?
-Pay down your debt- get your credit utilization under 20% or better 10%.-Pay ALL of your bills on time- especially the ones that affect your credit the most (student loans, auto loans, mortgage, personal loans).
-Keep your balances as low as possible.
-Avoid letting payments/accounts going to collection.
-Correct any inaccurate information that can be in your report.
-Keep older credit cards open but on ZERO.
-Open a secured credit card.
How does a Credit Score range?
- Very Poor - 300 to 579*
- Fair- 580 to 669*
- Good- 670 to 739*
- Very Good- 740- 799*
- Excellent- 800-850*
Here is the breakdown ...
*Very Poor- with this score you are very unlikely to qualify for a loan
*Fair- with a score between 580 to 619 is still very unlikely for you to qualify for most loans. With a score of 620 to 669, you may qualify for loans but with a very high-interest rate.
*Good- this is the range where you start to qualify for most loans, the closer you are to the 670 scores the interests are still very high.
*Very Good- This is the range where you start to qualify for the lower interest rates.
*Excellent- here you are #goals and you qualify for all loans and the best interest rates.
How can I see my score throughout the year?
- Credit Karma- it's a free app that gives you an estimate of your score (your actual score can be 20-50 points lower than what Credit Karma tells you). Credit Karma also only shows your Transunion and Experian score.
- NerdWallet
-Your Credit Card Company- companies like Discover and Capital One will tell give you your score with your statement.
How can I get my Credit Report?
You are able to get your credit report from different resources during the year. These places will give you your full report every 12 months (except FICO).- www.annualcreditreport.com
- www.myfico.com - fico does not offer a free credit report, but it does have memberships.
- www.transunion.com (June)
- www.equifax.com/fico-score-credit-watch (February)
- www.experian.com/reportaccess (October)
- Call 1-877-322-8228- Annual Credit Report
Other relevant information ...
Different loans and lenders read and require different scores based on the specific loan. Meaning, the required credit score needed for an auto loan is different than the required credit score needed for a mortgage.
- Auto Loans- use FICO Auto Scores. This means that the auto lender can pull your score from any or all three bureaus.
- Credit Card- FICO Bankcard Scores or FICO Score 8. This means that for a credit card the lender can pull one or all three bureaus.
- Mortgage Loans- FICO Score 2, FICO Score 4, and FICO Score 5 are used in the majority of mortgage credit evaluations. This means the lender will pull from ALL three bureaus.
*For more information on the different scores, go to www.ficoscore.com/education/#scoreversions
Now that you are all caught up with the basics of credit score and how to work on it, here are my tips:
- Pay more on your debt if possible. BUT always make sure to pay the minimum balance on time.
- Don't bite more than what you can eat- if don't have the money on cash do not use the credit card.
- Don't exceed 30% of your maximum credit line. Both total and for each of your accounts. Keep your credit card expenses under 10%.
- Create a plan for paying off your debt & stick to it.
- Check your credit report at least once a year to ensure there are no mistakes that could be affecting it.
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