Hey y’all! Me again!
I got to thinking about my earlier post and the secured credit card as a tool to build your credit. I came to the realization that your credit score is really more than just “good” or “bad” credit and just because I have spent the last 7 years obsessing over my finances and credit, doesn’t mean everyone else has! I’ve taken a lot of time to educate myself about credit and to understand it better. Rest assured, there’s a treasure trove of information online about credit scores and credit in general, but this is the distilled version- the Moonshine version, if you will. 😉
What in tarnation is a credit score?
- Per Google Dictionary: ‘a number assigned to a person that indicates to lenders their capacity to repay a loan’. In other words, this number lets financials and other lenders know how likely you are to pay back any money they loan you, be it installment loans, a mortgage or even credit cards. Just about everyone knows that having a low score means you’re less likely to be approved for credit and a higher score means you’re more likely to be approved. This is because lenders assume that a person with a higher credit score and a strong credit history is, essentially, a “safe bet”. They’re believed to be more likely to pay back a loan because they’ve proven previously that they can and will pay back a loan. The credit score most used by lenders today (and the score you see if you’re keeping up on your score with Credit Karma!) is your FICO score (Fair Isaac Corporation). FICO determines your score using computer software that analyzes a range of credit information to determine how likely you are to, well, screw over your lenders.😊 Those with no credit history are likely to not get approved for lines of credit because they have no proven credit history and therefore no information on which to base a credit score (this is where that secured card can help!).
- Your credit score and your credit report are two different things. Your credit report provides a whole helping of information about your credit history, while your credit score is a solitary number that denotes your credit worthiness.
What’s a good credit score? A bad one?
- FICO scores range from 300-850 and the higher the score, the better (e.g. the more likely you are to be approved for whatever you’re applying for and the lower your interest rate is going to be).
- Scores range as follows:
- Bad- 550 or lower
- Poor- 550-649
- Fair- 650-699
- Good- 700-749
- Excellent- 750 and greater
What makes up my credit score?
- Your credit score is made up of a few types of information and some information carries more weight than others:
- Payment history- are you constantly making late payments? Wonder no more why your score is in the toilet because your payment history is the heftiest part of your credit score at 35%!
- Debt- this is the amount you owe to your creditors, be it credit cards, auto loans, etc. The standard suggestion is to keep your debt equal to or less than 30% of your total available credit. This info counts for 30% of your score.
- Age of credit history- this is one that you have little control over when you’re just getting started in the world of credit. It’s recommended that you keep lines of credit or credit cards open (even if you’re not using them regularly) because this number is an average of the age of all the credit accounts in your name. Thankfully, this one only counts for %15 of your score.
- Inquiries- most places refer to these as ‘hard pulls’ or ‘hard hits’ to your credit score because too many of them can drag your score down. The impact of these inquiries typically lessens over time and they finally “fall off” your credit history after 2 years. This counts for a measly 10% of your score!
- Diversity of accounts- lenders want to see that you can handle different types of credit. Credit cards are typically where most people start, eventually moving onto installment loans (student loans, auto loans), mortgages and personal loans or home equity lines of credit. This carries less weight than other categories at 10% of your score, but only having, say, credit cards isn’t really helping your score.
What do I do if my credit score isn’t great?
- Read this post HERE! I talk about how I rebuilt my credit using 2 awesome tools- Credit Karma and a secured credit card.
What if my score is really, really, great?
- You can stop bragging, you jerk.
I just covered the basics here today, but if you have any more questions ask them in the comments section! Keeping track of your credit score is super helpful and important, especially if you plan on applying for credit any time soon- or ever. Credit Karma is a great tool for this, but it can also suggest products it believes will be beneficial to you and even help you refinance your auto loan (my boyfriend did this a few months ago and his interest rate dropped by 10%!).
Do any of you use Credit Karma? Do you love it as much as I do? 😊 Let me know down below!