Understanding Your Credit Score

(First and foremost, let's get you over to the audio version of this blog if you haven't heard it yet!)

Are you worried about your credit score?


People tend to focus on their credit score and their weight, right? The truth is that so many people reach out to me about their credit score.


I’d like to change that without overwhelming you. That means we can't cover every aspect surrounding your credit score today, so I'm going to touch on a few points today and save the others for later.


Let’s start into the weeds.



What is a credit score?


It's the statistical number that evaluates consumer creditworthiness. It's based on your credit history.


Lenders typically use credit scores to evaluate the probability that you will repay your debts. So the credit score was created by the Fair Isaac Corporation (aka FICO).


  • FICO = credit score


Remember getting report cards in school? It’s basically the same thing--only for your finances.


It does not factor in every tiny little aspect of your financial life. Credit scores are based on your borrowing and payback history, not how financially savvy you are and your overall net worth.


Your credit score is not the end-all-be-all.


It’s based on lending history and not everyone finances everything. There are people who have a lot of money and don’t have a credit score. That is why lenders will also ask for other income and asset information when you borrow money. That’s one of the topics we’ll delve into in the future.


Wouldn’t it be a crazy goal to be so financially independent that you were able to finance everything for yourself? Then credit scores would have no meaning.


However, for now, that number probably has quite a bit of meaning, so let’s learn more!


What’s the number got to do with it?


That all depends on the number.


A credit score might range from 300 to 850 points.


  • Good is above 670

  • Very good are above 740

  • The exceptional credit score would be 800+


60.7% of Americans have a good credit score.


What’s your number?


Why is the credit score important?


Are you credible?


Your credit score is used by institutions to determine whether you are credible or not. It helps them to determine the amount of risk they’re taking by working with you.


Who might check your credit score?


  • Lenders

  • Landlords

  • Employers

  • Utility Companies


They may be looking at the credit report instead of the actual number.


What goes into your credit score?


Are you the victim of credit myth?


Caution: Clues for credit score improvement ahead.


First, let’s break down what your credit score consists of:


  • Payment history (35%)

  • Credit utilization (30%)

  • Credit history (15%)

  • Type of credit (10%)


What does each category cover?


  • They’ll evaluate your payment history by looking to see if you pay on time and the full amount.

  • Credit utilization is the amount owed versus how much credit is available to you.

  • The length of your credit history depends on how much information they have on you. They’re looking for patterns.

  • What types of credit you have means the mix of loans such as mortgages, credit cards, car loans or other types of loans that you have taken out.

  • Types of credit are exposed as hard hits, these mean inquiries made by applying for credit cards or having new credit lines.


Now you have a better understanding of what factors build your credit score.


Credit tales


Let's talk about a credit tale that has been passed around for ages.


I was told to run a balance and not pay off my balance every single month in order to build credit.


Remember credit utilization?


It makes up 30% of a credit score, so you’ll want to pay off that credit card in full each month.

What happens if you don’t pay off your balances?


It costs you money in interest and it's not a part of good financial habits. If your credit score is the reason for having a balance, then toss that idea out the window because if you pay your balance off, you are lowering your credit utilization percentage which is a good thing!


Using your credit line, making the payment on time, and paying it off will build your credit history.



Is closing a credit card a good or bad idea?


Your credit history is important.


Keep in mind that your credit history makes up 35% of your credit score.


Closing a long-term credit card may not improve your credit history. If you want to close credit cards, you may want to cut them up instead.


Leave the one with the longest history.


The big-box store asks you to open a credit line. Is that a good deal?


Sure they’re offering the incentive of saving 20% on your purchase today. However, my answer is still… no!


Remember that new credit affects your credit score.


Not only that, my experience working with budgets has shown me that store credit cards create future store purchases, which is not a good thing.


But what about the potential points?


I love points just as much as the next gal.


However, they can be a dangerous and slippery slope if you don’t have great credit and budgeting habits.


Points shouldn’t be the reason why you get into credit!


There’s so much to know about credit, so we’ll be writing future blogs covering different aspects of your credit score.


Tell us how you’ve increased your credit score--or accidentally brought it down a notch!


Leave a comment below!


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