Try that line at your family reunion this summer! It’s a great thing that we are paying more attention to our finances, but perhaps we can approach this in a more positive way. While credit scores have been around for decades, there seems to be a lot of confusion about what a credit score is and why a good score is important.
What’s a credit score? There are four companies that track and create a credit report for pretty much every American. This report is a summary of what loans and credit cards you have, your history of paying your bills, and how much debt you have compared to what you could borrow.
Your credit score is like a grade you get from back in school. It is calculated based on your credit report, using a scale from 300 to 850. There are 5 basic categories of this range. They are as follows: Very Poor 300 to 549, Poor 550 to 649, Fair 650 to 699, Good 700 to 749, and Excellent 750 to 850. (Kind of like getting a grade of A, B, C, D, or F).
Why is a good score important? So why would you care about having an “A” or “Excellent” credit score, other than just the thrill of being able to brag about it at the family reunion? Having a good to excellent credit score means life can be less expensive compared to someone whose credit score is less favorable. A person with a solid score can get lower interest rates on mortgages, car loans or personal lines of credit. A high score can also help lower the cost of insurance. Utility companies will often require less of a security deposit for someone with an above average credit score. It can even make a difference in your ability to get a job.
How is a credit score calculated? There are 5 major factors that make up your credit score. 35% is based upon your payment history. In other words, have you paid your bills on time? 30% is based upon the amounts owed. This is a total of all your reported debts. 15% is based upon the length of credit history, or how long you have had reportable accounts. 10% is based upon new credit. In other words, how often are you applying for new accounts? And the final 10% is based upon what types of credit you have (credit cards, loans, utilities, etc.). So you can see, there’s more to a credit score than simply what you owe. In fact, because there are various factors, having no debt could actually be detrimental to your credit score.
How can I improve my credit score? In order to raise your credit score, you get the most bang for your buck by concentrating on the two biggest factors: your payment history and how much you owe. Making it a habit to pay all bills on time can boost your score. Maintaining a manageable amount of debts can help, as well. In this day of online payments, it’s easy to schedule automatic payments, so use this feature to your advantage. If you can, pay credit card balances off each month in full. And, please, avoid high risk loans like paycheck or car title loans. They don’t do you any good in the long run.
In summary, a credit score is simply a snapshot of your financial life. Don’t worry about what your uncle or cousin claims their score is because that doesn’t matter in your financial life. What matters most is that you have a plan to improve or maintain your own personal credit score.
I hope this information gives you confidence to achieve your own definition of financial success. Please feel free to contact me with any questions.