10 Critical Things You Should Know About Your Credit ScoreKathleen Celmins
Today we’re going to talk about your credit score.
Why is it important to understand the components of your credit score? Well, for one, many can be confusing, and to get your finances on the right track, you need to understand them. The only way to take control of your financial life is by taking one step at a time, and if you understand every component of your credit score, you will be better able to improve it!
I applied for a car loan in 2010. I was given a 9.6% interest rate because I had a credit score of about 600. Two years later, I qualified for a 2.9% interest rate when I refinanced that loan. Why? My credit score had risen 150 points! Read on to understand the different components of your credit score, and don’t ever take a car loan at 10%!
10 Components of Your Credit Score, Defined 1 of 11
1. Your FICO Score 2 of 11
FICO, formerly known as the Fair Isaac Corporation, is the most widely used scoring system for credit reports. This is scored like some sort of achievement test, and your scores range from 350 to 850. Higher is better in this game. We're not playing golf.
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2. The Three Different Reporting Agencies 3 of 11
Three different agencies keep track of your credit report: Experian, TransUnion, and Equifax (links to their Wikipedia pages). You can order a free report, from each agency, every year, and you should. With personal finance, knowing is more than half the battle. They all use a different scoring system, too, so your credit score could be as much as ten points different from one agency to the next.
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3. Credit Report vs Credit Score 4 of 11
This is confusing. You can pull your credit report once a year for free, but you can't get your credit score unless you're applying for a mortgage. The reports sound like elementary school grades (excellent! fair!) and they don't give you a full picture. That is why you should be using something like Credit Sesame because even though they don't get the full FICO score, they have an algorithm to get close. That way, you can keep track of a hard number score without having to buy a car or a house (thank goodness!).
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4. Debt to Credit Ratio 5 of 11
The debt to credit ratio measures the amount of credit you are using. It's the dollar value of your credit cards divided by the dollar value of your total credit limit, and you want this number to be as low as possible. It's also called your utilization rate, and anything over 30% utilization will negatively impact your credit.
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5. Debt to Income Ratio 6 of 11
The debt-to-income ratio helps show how much "room" you have each month for additional debt. To find yours, add up all the monthly debt requirements and divide that sum by your monthly income. Lenders are looking for a number under 28% when you're looking to buy a house, because they don't want you to lose your house because you couldn't afford to both make payments on your mortgage and pay to repair things around the house.
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6. Mistakes on Your Credit Report 7 of 11
7. What About Store Credit Cards? 8 of 11
They always ask you, don't they? "Do you want to save 15 percent today by opening a card?" The right answer is, "no, thank you" almost all the time. Possible exceptions include a branded credit card at a store where you spend money month after month. Don't feel bad when you tell the checker no. They get compensated for every person who signs up through them. They're not looking out for your best interest. And don't get the debit card, either. You don't need to give some company access to your account.
Plus, store credit cards are so easy to forget about. When you get your credit report, you'll see all the store cards you opened and likely never closed. Go ahead and close them. They usually have very small limits.
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8. Monitor Your Credit Closely 9 of 11
You want to keep a close eye on your credit score, which is why using a service like Credit Sesame can make a lot of sense. It will send you alerts when your score changes or when someone is poking into your credit. I love it because it takes away a lot of surprise. I recently asked my credit card company for an increase in my credit limit, and two days later, Credit Sesame sent me an email saying that the credit card company looked at my credit, and my score changed by two points. It helps keep identity theft at bay.
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9. Creditworthiness 10 of 11
Your creditworthiness is determined by a lot of factors, and the higher your score, the more worthy you are to creditors, which means they're more likely to loan to you, and more likely to give you a great rate, which is kind of a sad vicious cycle.
You want your credit score to be high, but you don't want to take out all the loans you qualify for.
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10. The Credit Score Scale 11 of 11
Credit scores range from 350 to 850, and the scale breakdown is as follows:
720 - 850: Excellent
680 - 720: Good
640 - 680: Fair
350 - 640: Poor
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