Do you know your credit score? These three little numbers can impact your financial life as much as your bank account balance and the amount of your paycheck, yet few give it that level of attention. Even fewer have a solid understanding of how to positively impact your credit score and how to monitor and protect it. Good news! We’re going to lay out some credit score essentials in this feature so you can take control.
What is a credit score?
Your credit report is a record of how you manage your money. Most lenders and many other creditors report your account information from credit cards, auto loans, mortgages, etc. to one or all the three major credit bureaus. Your account data is then distilled and calculated to create your individual credit score – typically between 300 and 850.
Each person actually has several credit scores because there are several different credit scoring models. And for each credit scoring model, there are three different credit scores for each of the three major credit bureaus. So, through one source, you might have a 710 credit score and another you may be a 690. And they are both correct.
Who are the major credit bureaus and how can I get my credit reports?
We highly recommend getting a copy of your credit report from each bureau: Experian, Equifax, and TransUnion. By law, you are entitled to one free report from each per year and it will not negatively impact your score. An easy way is to get these reports is by going to www.annualcreditreport.com.
These reports will not include your credit score but will include your account data that leads to your score.
A recent study conducted by the Federal Trade Commission revealed that one in five people have an error on at least one of their credit reports. So it’s worthwhile to verify accuracy!
What is a good score?
One of the most well-known types of credit score are FICO® Scores, created by the Fair Isaac Corporation. FICO® Scores are used by many lenders, especially mortgage lenders. According to Experian, the following are general rankings for a FICO® Score. Although each lender establishes its own cutoff levels.
800-850 Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
300-579 Poor
The average consumer FICO score in 2020 was 710, based on Experian studies.
What are the major factors that impact my score?
Let’s focus on the three biggest factors that will help you build and maintain a strong credit score.
- Your payment history accounts for 35% to 40% of your score. Review your credit reports to make sure your payment records are accurate. If you are not up to date, make it a priority. Set up an automatic payment deduction from your checking for your recurring loan payments.
- Your level of credit utilization makes up 20% to 30% of your score. This factor considers your total outstanding credit card/line of credit balances to your credit limits. So, for example, if all your credit cards and department store card balances are $4,000 and your combined credit limit is $10,000, your credit utilization is 40%. To improve your credit score, pay this down to 30% or less. When you are tapping your credit limits, it negatively impacts your credit score.
- Type, number, and age of your credit accounts also weighs heavily. Closing a credit card is more likely to hurt your credit score than to help it. Yes, that $300 Macy’s card you got in your 20s just to get the sale price on those shoes is now really helping! Leaving old accounts open, especially if they’re in good standing, is typically better for your credit score. (Just may sure there are no annual fees.)
A longstanding credit score myth we can dispel: Your income and bank account balances are not direct influences on your credit score. These may be decision factors for a lender but will not be reflected in your credit score.
Inquiries do not have the major negative impact on credit score that many believe. And most credit scoring models account for multiple inquiries within a short period of time. So, if you are trying to get the best deal on a car loan or mortgage, it’s OK to shop lenders for the best rate, just do it within a two-week period.
How can I keep track of my score?
Many major banks, credit unions and credit card issuers offer credit scores for free! Often this is a feature of the institution’s online banking. Check with your bank for this free service. Then you will be able to review your credit score monthly to track your progress or be tipped off to possible fraud if you see a sudden unexplained dip.
If you do a web search for credit score, you will likely see ads for countless credit monitoring services. These are most often paid services. This credit monitoring can be expensive and unnecessary. So please check with your bank first to take advantage of their free credit score services, get copies of your free credit reports from all three bureaus, and take control of your credit score!
Stay Money Wise
We hope our Money Wise Personal Finance series of feature articles are guiding you to smart financial decisions. In December, we covered Setting A Budget. If you missed it, you can still check it out online at www.metrosource.com Some upcoming planned features include: Savings Strategies, Living Debt Free, Smart Spending, and other timely personal finance topics as 2021 unfolds.
This information is intended to provide general guidance. We encourage you to consult your financial advisor and tax planner to review your individual situation before making any significant financial decisions.
Last modified: March 22, 2021
