Your Credit 101 Guide

Credit scores can be difficult to understand. However, they are a necessary part of your life! That is why it is important for everyone to know the significance of credit scores, how they impact different areas of life, and how to make sure your credit score is in good health. It may seem like it is complicated to understand but luckily that’s not the case. Understanding your credit score just takes a little bit of learning!

What is a Credit Score?

Your credit score is a number that generally ranges from 300 to 850. This score is calculated based on information found on your credit report through credit bureaus (also known as credit reporting agencies). Your credit score shows lenders your creditworthiness. This just means that they can have a better understanding of you as a borrower and how likely you will be to repay the money that you borrow.

There are three main credit bureaus that will calculate your information: Equifax, Experian, and Transunion. The information on your credit report is what they use. Your credit report has information about your credit history and credit activity. There are two main scoring models that they follow when calculating your score which are VantageScore and FICO (but the FICO scoring model is more popular).

What Factors Impact Your Credit Score?

Now that you have a basic understanding of what your credit score is, it is important to understand the factors that will have an impact on it. There are five main factors that will have an effect on your credit score which are:

  • Payment History (35%)
  • Credit Utilization Ratio (30%)
  • Credit Age (15%)
  • Hard Inquiries (10%)
  • Credit Diversity (10%)

Payment History

This is the most important factor of your credit score and accounts for 35% of it! Your payment history can better show lenders how you handle repaying your debt. That is why it is always important to pay your debts back on-time for the full monthly payment due. Late payments, collections, bankruptcies, etc., can be a huge red flag to lenders.

Credit Utilization Ratio

Your credit utilization ratio looks at how much credit you are using (referred to as your credit usage) compared to the total amount of available credit that you can use (referred to as your credit limit). For example, if you have 3 credit cards but a total credit limit of $3,000 then you will want to aim to keep your credit utilization ratio below 30% so no more than $900. When you keep your utilization ratio below 30%, you reduce the negative impact that a credit balance can have. This is the second most important factor that impacts your credit score and accounts for 30% of it.

Credit Age

The age of your credit accounts for 15% of your credit score. Your credit age takes into consideration factors like the age of your oldest account, the age of your newest account, the average age of your accounts, etc.

Hard Inquiries

While this factor is tied in last place since it only accounts for 10% of your score, it is still something to keep in mind. There are two types of inquiries, hard inquiries and soft inquiries. Soft inquiries do not have any impact on your credit score and can provide a sneak peek at your true credit score. Soft inquiries are typically used for advertisements or for prequalifying.

On the other hand, there are hard inquiries. Hard inquiries are a bit of a different story since they require authorization from the account holder with a signature. That is because it provides lenders access to a more in-depth and accurate look at your credit score. These inquiries cannot be done without the written consent of the creditholder!

Credit Diversity

There are two main types of credit accounts. There are installment loans and revolving credit. Having a better credit diversity may be able to strengthen your credit score. However, you shouldn’t go out of your way to get a variety of different kinds of credit since it only accounts for just 10% of your score!

Why are Credit Scores Important?

When understanding credit scores you may feel like they aren’t that important, but that’s not true! Your credit score is an important part of getting loans, credit cards, housing, cell phone plans, and more. Having a bad credit score may disqualify you from lenders. Even if you still qualify you will likely have a higher interest rate than those with a good credit score.

Understanding Different Credit Scores

There are different categories for your credit score depending on the scoring model. Generally credit scores that are between 580 to 669 are considered “fair”, scores between 670 to 739 are considered “good”, scores between 740 to 799 are considered “very good”, and scores over 800 are considered “excellent”. When lenders see that applicants have a higher credit score, they assume they face less risk with that person as a borrower.

While every lender is different, typically scores 670 or higher are considered “acceptable” and pose less of a risk to lenders. However, scores between 580 to 669 are typically seen as subprime which means it can be harder to qualify with lenders. If a credit score is under 580 then it is considered “poor” and can have an even harder time qualifying with lenders.

How to Improve Your Credit Score?

Luckily improving your credit score isn’t as impossible as it may feel. While it takes time, you can improve your credit score all on your own. Some people also choose to get help from a credit repair company but we will talk more about those later! Popular ways that people can improve their credit scores on their own include:

  • Tackling Credit Card Debt
  • Raising Your Credit Limit
  • Becoming an Authorized User
  • Handling Bills Responsibly
  • Disputing Errors on Your Credit Report
  • Trying a Secured Credit Card
  • Using Experian Boost

Tackling Credit Card Debt

One way that you can improve your credit score is by tackling your credit card debt. A good rule of thumb is to keep your credit utilization ratio below 30%. Like in the example we said earlier, if your total credit limit is $3,000 then that means you should be using no more than $900. If you have a lot of credit card debt you will want to focus on bringing that down.

Raising Your Credit Limit

Another way that you can improve your credit utilization ratio is by getting a higher credit limit. Sometimes credit card companies automatically raise your credit limit. Other times, a borrower can request for their limit to be raised. Regardless, if you have a higher credit limit your credit utilization ratio will be less since the credit limit increased and your credit usage stayed the same.

Becoming an Authorized User

If there is someone you trust with a credit card account then you may benefit from becoming an authorized user on their account. You want to make sure the person you choose has a good credit history of on-time payments! When you are added as an authorized user, you can reap the benefits of responsible credit management without having to worry about paying a bill! Generally authorized users are given their own card but the account holder doesn’t have to provide that information. However, if you do get your own card to use, you will want to be respectful and handle any debt you rack up.

Handling Bills Responsibly

Since payment history plays such an important part of your credit score, it is important to handle your bills responsibly. You want to make sure you pay your bills on time for the full amount due when you have to pay. Proper credit repayment can boost your score and just make your entire credit health better overall. If you struggle with remembering due dates then you may benefit from automatic bill pay. Automatic bill pay will automatically take the funds out of your account to handle your bills. You will still want to make sure you see the payment leave your account but it can take a lot of stress out of remembering to pay your bills manually!

Disputing Errors on Your Credit Report

Another way that people may be able to improve their credit score is through disputing errors on their credit report with the credit bureaus. Your credit report is important because the information on this report impacts your credit score. If there is an error that has a negative impact on your score, then removing that error would remove that negative impact.

People can handle credit report disputes either on their own or with the help of a credit repair company. Handling the process on your own is free but can take some time since you will need to handle the process by yourself. Some people choose to get help from a credit repair company but these companies can be costly and not as effective as people may think. Regardless of how you choose to do it, disputing errors on your credit report may be able to improve your credit score if they are successfully removed.

Trying a Secured Credit Card

The two popular types of credit cards are secured and unsecured. Secured credit cards are a great tool for people that want to work on building their credit but may not qualify for an unsecured credit card. If you choose to get a secured card, then you will need to provide collateral upfront like a deposit. Generally these deposits will indicate your credit limit. This is easier for people to qualify for since it reduces the risk that a lender faces with an upfront payment!

Using Experian Boost

As technology advances, so do the systems we use! A benefit of this is a tool called Experian Boost. Experian Boost is offered by Experian (one of the three major credit bureaus) and can help people improve their credit score by reporting streaming services, phone bills, and utility bills. These bills are not normally added to your credit report. With Experian Boost, this added payment history may be able to improve your credit score.

Commonly Asked Questions

Understanding your credit score can come with some questions. If you have questions you are not alone! Plenty of other people had questions when learning about their credit score that you may have too.

What are Credit Counseling Agencies?

When reviewing your credit score you may come across a credit counseling agency. These agencies help people better understand their current situation. They can even provide a plan of action to find a solution to issues that people may be dealing with. Generally these agencies are nonprofit that can provide assistance through debt management, credit counseling, housing counseling, homebuyer education, student loan counseling, and more.

What is an Authorized User?

We spoke about authorized users earlier, so it is important that you have a clear understanding of what they are. An authorized user is a secondary account holder on a credit card. The primary account holder is the one that is responsible for handling credit payments on time. Secondary account holders can reap the benefits of proper credit management without having the responsibility of paying.

When Do Negative Items Fall Off Your Credit Report?

Negative marks on your credit report generally don’t stay there indefinitely. Instead, after a certain amount of time a majority of them fall off! However, how long it takes for the negative mark to fall off your credit report varies depending on the issue:

  • Hard Inquiries: 2 Years
  • Late Payments: 7 Years
  • Foreclosures: 7 Years
  • Collection Accounts: 7 Years
  • Chapter 13 Bankruptcies: 7 Years
  • Unpaid Taxes: Indefinitely or 7 Years from the Last Date Period
  • Chapter 7 Bankruptcies: 10 Years

Overall

Your credit score isn’t as complicated as it may seem. It is a number generally between 300 to 850 that indicates your creditworthiness as a borrower. Your credit score is an important part of life and can impact getting a car, buying a home, qualifying for loans, and more. There are five main factors that impact your credit score which are your payment history, credit utilization ratio, credit age, hard inquiries, and credit diversity. If you don’t have a good credit score there are ways you can improve it! There are plenty of different methods to use like:

  • Tackling Credit Card Debt
  • Raising Your Credit Limit
  • Becoming an Authorized User
  • Handling Bills Responsibly
  • Disputing Errors on Your Credit Report
  • Trying a Secured Credit Card
  • Using Experian Boost

Regardless, if your credit score could use some improvement then you may not be out of luck! Hopefully this article was able to help you better understand what your credit score means to you and provided some advice on better managing your score! If you have any questions you should talk to a professional at a credit counseling agency or another financial institution.