Understanding Your
Credit Score

So, what is a credit score exactly? The short answer it’s a three-digit number that many financial institutions use to gauge the risk of loaning money to you. The higher your credit score, the more likely it is you’ll pay back the money you borrow.

The long answer is that your credit score is a score based on the information in your credit report. Your credit report contains your personal information, which creditors will use to confirm your identity, as well as your payment history on accounts in your name including:

• Credit card accounts
• Loans (including mortgages)
• Foreclosures
• Repossessions
• Any bills in collections

Your credit report will also show any hard credit inquiries in the past two years, which just means the number of times a lender has received your permission to look at all the information in your credit report. It can leave a mark on your credit report, but the effect is generally negligible—unless your credit report shows too many hard credit inquiries in a short period.

Some people also call credit scores FICO scores. What is a FICO score? It’s simply the industry standard formula developed by the Fair Isaac Corporation to determine your credit score, and many people use the terms synonymously.

Credit rating agencies determine your credit score based on five key factors from your report. However, they consider some factors more important than others.

• Payment History (35% of Your Score): This is the largest factor in determining your credit score. It reflects your track record of repaying debts and even includes information from public records, such as bankruptcies, foreclosures and liens.
• Amounts Owed (30% of Your Score): This category, also known as credit utilization, is a measure of the amount you owe on existing credit compared with your borrowing limits. For example, if you owe $1,500 on credit cards but you have $10,000 in available credit card limits, your utilization will be lower than if you owed the same amount but only had $3,000 in available limits.
• Length of Credit History (15% of Your Score): This isn’t the most important factor, especially if you’re strong in the other categories. However, young adults who might be wondering “How do I get a credit score?” should know that you have to have a trade line, such as a credit card, and make regular payments for six months before you get an official credit score.
• Types of Credit in Use (10% of Your Score): This is the variety of accounts you have, including credit cards, installment loans, and mortgage loans. Your credit score can increase if you have a good payment history with a combination of credit cards and installment loans.
• New Credit (10% of Your Score): How many of your credit accounts were just recently opened can affect your credit score, as does how many hard credit inquiries have been made in a short period of time. This is important to lenders since research shows that when people open several accounts in rapid succession, they’re at greater risk of defaulting on their payments. 

You should also know that you don’t have just one credit score. There are three national credit bureaus—Equifax, Experian and TransUnion—and they all calculate their scores independently of each other. This is why  you might be asking why are my credit scores different across various lenders or online credit score apps

Even though you will have three different credit scores, they shouldn’t vary too much from each other. If one score is very different than the others, though, you’ll want to review that bureau’s credit report to make sure it doesn’t contain any erroneous information.

So why do credit scores matter?

Since your credit score sums up all the information on your credit report, many businesses use it as a benchmark to determine not just your financial health, but how reliable you are at making payments on-time. As a result, your credit score may determine:

• If you get a new loan or credit card
• How much you’ll pay in interest on the loan
• How much money you can get when you take out a loan
• Whether you’ll be able to get a reverse mortgage
• How much of an insurance premium you’ll pay
• Whether a landlord will rent an apartment to you
• Whether you’ll get hired by an employer
• What kind of smartphone contract you can get
• Whether or not you’ll need to make a security deposit with the utility companies

Since your credit score affects so many aspects of your life, you need to monitor it regularly. Here are a few ways to check your credit score:

• Check your credit card, financial institution, or loan statement: Many companies have started providing credit scores on the monthly financial statements for free. It’s important to know that these scores are known as educational credit scores and are only meant to help you monitor your score more regularly.
• Purchase credit scores directly from one of the three major credit bureaus or another trusted provider, like FICO.
• Use a credit score service or free credit scoring site. Some sites like Credit Karma, Discover, or even your local credit union provide a free credit score to users. Others may provide credit scores to credit monitoring customers paying a monthly subscription fee.

In addition to checking credit scores, it’s a good idea to regularly check your credit reports to ensure that the information is accurate and complete. One of the best ways to do that is by requesting a free copy of your credit report from each of the three major credit bureaus once every 12 months at www.annualcreditreport.com. Make sure to review each of the credit reports from the three bureaus carefully to make sure none of them contain inconsistent information or inaccuracies.

Credit scores typically range from 300 – 850.  The higher your credit score the better. Here’s a closer look at what your credit score might indicate to your lender.

• Scores under 550: This is far below the average score of U.S. consumers and demonstrates to lenders that you may be a risky borrower. Getting approved for a loan may take longer than those with higher credit scores.
• Scores between 550 – 649: This credit score range is also below the average score of U.S. consumers, but many lenders will still approve a loan with this score. You may have higher interest rates or require a co-signer.
• Scores between 650 – 699: This is the average range of U.S. consumer credit scores and most lenders consider this a good score. However, if you are at the lower end of this range you may have slightly higher interest rates or require a co-signer on loans. 
• Scores between 700 – 750: This credit score range is above the average score of U.S. consumers and demonstrates to lenders that you are a dependable borrower. There should be no issue with you obtaining a reasonable interest rate on a loan. 
• Scores above 750:  If your credit score is above 750, the answer to “Is my credit score good?” is “Yes!” You are well above the average score of U.S. consumers, and you should have no problem obtaining a loan that has the lowest interest rates available. You are considered a highly dependable, low risk borrower.

You may also see some lenders give a letter grade to credit scores. Here’s how it works:

• If you're credit score is above the 720 mark, you're considered to have A credit.
• Any credit score between 681 and 720 falls into B credit.
• When your score falls between 621 and 680, your credit rating is a C
• Anything below 620 is a D credit rating

Some financial institutions may even break these grades down further into sub-ratings, such as A+ credit or C - credit, based on their lending guidelines and risk rating structures. 

So how exactly do you get that coveted 700+ score? While there is no one magic formula that will give you a high credit score, we have pulled together five steps that will help you build a solid credit score, even if you have no credit score at all:

1. Maintain a solid repayment history

Since your payment history is the biggest factor that can affect your credit score, you’ll want to make sure your bills are paid on time. Fortunately, this is also one of the easiest parts of your credit score to manage, since you are in control of when you pay your bills.

• Pay your bills on time, set up payment reminders or automatic payments 
• If you have missed payments, get current and stay current
• If you are having trouble making payments, reach out to your lender right away for help

2. Manage the Amount of Debt You Owe

Owing money is not necessarily a bad thing when it comes to credit scores. The key to good credit management is to be aware of how much you owe on revolving credit accounts such as credit cards. The bigger your balances, the more concerned lenders will be that you are overextending yourself.

• Keep balances low on credit cards and other revolving debt
• Pay off debt instead of moving it around

3. Maintain the Length of Your Credit History

While you only need six months of credit activity to begin building your credit score, the longer you’ve had the same accounts open, the better picture lenders have of your financial behavior, especially when it comes to repaying loans and credit cards.

• Don’t close old credit card accounts if you’re not paying a fee to keep them open
• Don’t pay off installment loans too quickly either, steady payments are good for your credit score

4. Open New Credit Accounts Sparingly

Opening new credit accounts have an impact on your credit score. Obtaining too many credit cards to quickly, can negatively impact your score.  This is especially true if you're obtaining credit for the first time.

• Only open a new credit line if you actually need it
• Avoid having multiple store/retail credit cards (yes, even if you might “get 20% off” your purchase that day).
• Keep the number of credit cards you own limited to one or two

5. Check Your Credit Mix

Credit mix is the combination of credit cards, installment loans (like personal loans and vehicle loans), finance company accounts and mortgages you have. You don't need to have each type of loan, but you also do not need to open credit accounts if you don't need them.

• Look for ways to diversify the type of credit you have
• Take out a credit builder loan to increase your credit score  

If your credit isn’t as high as you’d like, the good news is you can rebuild a poor credit score. The bad news, though, is that it will take time. Here’s how to improve your credit score:

• Make sure to make your payments on time each month. This is the most important step you can take to rebuild credit.
• Get current with any expenses. If you’re having trouble paying off your bills each month, reach out to your creditors and ask for help. They might be able to give you a month or two of breathing room between payments, and you might even be able to restructure your debts.
• Pay off your debts as fast as possible. Throw any extra money you have at your debts and avoid putting any new charges on your credit cards.
• Contact the credit reporting agencies and getting a copy of your credit report. Make sure the information is accurate, and if it isn’t contact the credit agencies and let them know.

Once you’ve taken these actions, you’ll probably be curious about when credit scores update. While you might see your score go up one or two points a week or two after you start rebuilding your credit, you should wait about a month before expecting any real results. This is because how fast a credit score changes depends on when the credit bureaus get the information from your creditors, which usually happens once a month.

How fast does a credit score change? If you’ve started making regular payments, it will probably take about a few months to see some real results. Remember credit scores reflect your payment history over time, so you’ll need to be consistent over several months.

If you’ve had to declare bankruptcy, however, you’ll have to wait a bit longer for your credit score to improve. You’ve probably already asked “Will bankruptcy hurt my credit?” before filing and realized that it will, but you might not know that once you’ve declared bankruptcy, you’ll have to wait 12-18 months before your credit score starts to rise. However, it will take about 7 years for the bankruptcy to be completely fall off your credit report.