You may not know it, but your credit score could be one of the most important numbers tied to your financial name. Whether you're applying for a loan, buying a house, determining interest rates, or even searching for a job, your credit score carries serious weight.
credit scores decoded
Your credit score is a three-digit number ranging from 350 to 800 that helps lenders, landlords, or potential employers assess your credit risk. It's generated by information in your credit report from each of the three major credit bureaus: Experian, TransUnion, and Equifax.
Paying bills on time can account for up to 35% of your credit score. The higher the score, the lower the interest rate you'll pay when acquiring a loan. Lenders use different credit-scoring models that dictate what they consider an acceptable score. An individual with a score above 700 usually will be granted credit at a good rate, says Gail Cunningham, vice president of membership and public relations at the National Foundation for Credit Counseling, Washington, D.C.
According to Bankrate.com, a very good score runs from 725 to 759, and 760 marks the low end of excellent.
Fair Isaac Corporation provides this breakdown of factors that affect your credit score:
- Payment history (35%)—Includes credit cards, retail accounts, loans, rent, mortgage, fines, and tickets.
- Amounts owed (30%)—Considers your credit utilization ratio—proportion of credit in use to credit available.
- Length of credit history (15%)—Time since accounts opened and account activity.
- New credit (10%)—Number of recently opened accounts or credit inquiries.
- Types of credit used (10%)—Number and mix of accounts, including credit cards, retail accounts, loans, and consumer finance accounts.
The scoring model analyzes how you can handle different types of credit, says Cunningham.
"For instance, it likes to see you responsibly pay a fixed payment such as a vehicle loan, while at the same time paying revolving charges from a credit card that are a different amount each month," she says. "Having a mix of general purpose cards and loans is best."
While many factors affect your credit score, treating credit with common sense usually will result in success.
building killer credit
Cunningham advises young adults who want to build a good credit history to start slow.
"You don't need a lot of credit—the most important thing is to use credit responsibly," she says.
Cunningham suggests holding at least three open and active lines of credit—a mix of credit cards and fixed payment loans. Use a credit card with some degree of frequency, as the activity creates the information for the credit report and subsequent score.
More ways to boost your credit:
- Pay bills on time. This can account for up to 35% of your credit score. Mark due dates ahead of time on a calendar, or ask your credit union about automatic bill pay. Paying on time for consecutive months can raise your credit score considerably.
- Keep a low credit utilization ratio. "Never charge more than you can pay in full when the bill arrives, and don't use more than 30% of your available credit," says Cunningham. For example, if you have a $1,000 line of credit, do not charge more than $300.
- Don't open a flurry of new accounts. You should avoid opening too many new accounts in a short period of time. This can send a red flag to lenders that you are taking on new debt—and temporarily lower your score.
- Don't close existing credit. Even if you're not regularly using a credit card, do not close it. Closing cards can shorten your credit history and affect your credit utilization score—thus lowering your total credit score.
- Pay your fines. Whether it's a parking ticket or a library fine, pay up. If debts are reported to a credit-reporting agency, they can knock your credit score.
Another way to build credit, if the 'rents approve, is to become an authorized user on their credit card. You'll have full charging privileges, but aren't legally responsible for payment, says Cunningham. (Of course, you have an obligation to your parents to keep your end of the bargain and pay up.) The activity will be reported on the primary cardholder's report as well as yours.
Cunningham also notes that co-signing a loan with your parents will be reflected on both your accounts.
And keep in mind that while store and gas credit cards can be easy to obtain, they usually come with high interest rates and low credit lines. The 20% that you'll save on purchases the day you apply for the store card is worth nothing—and can even cost you—if you can't pay your bill off in full when it arrives. Be careful, Cunningham cautions.
know your score
Everyone has a right to view his or her credit history. You can order one free credit report once a year from each of the three main agencies by going to AnnualCreditReport.com. A great way to track your score is to order your report from a different agency every four months. A basic version of your FICO credit score is available there for $5.95 after ordering your credit report.
Examine your report. Are there questionable items or mistakes? If so, contact the credit-reporting agency. Explain your concern and have supporting evidence for your claim.
A recent law also gives credit score access to those turned down for a loan. According to a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders who reject loan applicants must provide them with a free copy of the credit score used to make the decision, and an explanation.
Checking your credit score does not lower your score.
visit your credit union
Credit unions offer the best financial services, savings yields, and loan rates, along with reliable money management advice. Many credit unions are accustomed to working with students and young adults and can provide support specific to that age group. Campus credit unions also may offer special accounts or services for students. If you work with the professionals at a financial institution you trust, you'll be more successful at maintaining a healthy financial history and credit score.