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The Newbie’s Guide to Credit

Your credit score will impact nearly every significant purchase or serious financial decision in your life. Here's how to understand and make the most of your score to achieve your financial goals.

By
Andrew Charles, Partner
3-minute read
The Quick And Dirty

Understanding your credit score and scoring factors, such as payment history and card utilization, will help you increase your credit score and make the most of your financial health.

When it comes to your financial health, life is so much better if you can keep a good credit score. While it is just a three-digit number, it will impact nearly every significant purchase or serious financial decision in your life. Getting a cell phone, renting an apartment, purchasing a car, buying a home, or applying for a student loan all take into account your creditworthiness. This is often captured through your credit score. If you haven’t done much with your credit, here’s your guide to making the most of your financial health.

When it comes to your financial health, life is so much better if you can keep a good credit score. 

Understanding Credit Scores

The three-digit number known as a credit score falls between the range of 300 to 850, with the lower the number the worse your credit. There are two models used for scoring, either the VantageScore or the FICO, and there are three different credit bureaus that may pull your score when the time comes. The FICO scoring is as follows:

  • 850 to 800 (Excellent)
  • 799 to 740 (Very Good)
  • 739 to 670 (Good)
  • 669 to 580 (Fair)
  • 579 to 300 (Poor)

The VantageScore range is the following:

  • 850 to 781 (Excellent)
  • 780 to 661 (Good)
  • 660 to 601 (Fair)
  • 600 to 500 (Poor)
  • 499 to 300 (Very Poor)

You can’t know for sure which credit bureau a lender will pull your score from, making it important that you already know your score when thinking of applying for a loan or credit line. Each individual is able to request a copy of their score once a year from the reporting bureaus, though there are online companies that offer free credit score checks.

Looking at the Scoring Factors

Your credit score is determined using complex algorithms and several different factors. Knowing what impacts the score the most will help as you manage your finances and works towards building excellent credit.

Payment History (35%)

How well you manage your payments for credit accounts makes up 35% of your total score. Paying bills on or before the due date keep this a positive impacting factor. However, paying just one bill late could drop your score as much as 100 points. Late payments aren't generally reported until after 30 days, but you don't want to take any chances.

Card Utilization (30%)

The amounts you owe to lenders factor in at 30%. This is called your credit utilization, as the bureau looks at the total amount of the loans or credit you have used and compares it to what the total credit or account limits are. The higher your utilization, the lower your credit score will go.

Credit History (15%)

How long you have had credit plays a role in your credit score. Your credit history starts once you open a credit card, have a loan approved, or apply for insurance or a cell phone. As you age and your accounts remain open, this will build a longer history. The score also takes into account the type of account, whether revolving or installment and how long it has been since you used the account.

The better your credit score, the more likely you will receive favorable lending rates and contract terms, helping you achieve your life's goals or financial needs.

New Credit (10%)

How often you decide to apply for a line of credit impacts your score. Many new accounts or inquiries can show you are a credit risk, lowering your score's potential.

Credit Mix (10%)

The type of credit account you have matters when factoring in your score. You need a good mix of installment (mortgage or auto loan) and revolving credit (credit cards).

With this information, you should have a better idea of what a credit score looks like and how to make sure yours remains high. The better your credit score, the more likely you will receive favorable lending rates and contract terms, helping you achieve your life's goals or financial needs.