Explain your credit score secrets

Your credit score is a number used to measure your creditworthiness. It is an important part of your personal finances. For example, it is a big factor in determining the interest rates you will get on loans. If you have a good credit score, it can make life easier and cheaper.

By understanding how your credit score works, you will be able to manage it well and achieve excellent credit. In this guide, we’ll cover all the details you need to know, including what determines your credit score and how to use it.

How is your credit score calculated

There are three credit reporting agencies that calculate a credit score for you: Equifax, Experian, and TransUnion. These agencies maintain a credit file based on information they receive about you from creditors. Using this information, they calculate a credit score.

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If they all have the same information about you, your credit score should be the same with each one. Sometimes they have different information, which is why it is recommended that you check your credit report with each agency at least once a year. If one of them has incorrect data, this can negatively affect your balance.

To calculate your score, agencies use a credit scoring system. The most widely used is the FICO® Score system. It was created by the Fair Isaac Corporation, which partners with all three credit reporting agencies. While there are other types of credit scores, the FICO® Score is the one most lenders look at. It ranges from 300 to 850.

Factors that determine your credit score

So, what exactly goes into your FICO® score? Fair Isaac Corporation is a for-profit corporation, so it keeps this information confidential. Just like Coca-Cola doesn’t reveal its secret formula, so does Fair Isaac.

However, it did provide a general breakdown of the registration system on its website. Here are the five factors and how likely they are in your FICO® score:

  • Payment date (35%): The most important part of your credit score is your payment history with creditors. When creditors report that you paid on time, it is good for your credit. Any type of payment problem, such as late payments or filing for bankruptcy, is very detrimental to your credit score.
  • Amounts due (30%): This looks at the credit accounts you have opened, such as credit cards and loans, and how much you owe on them. Your credit utilization, i.e. the ratio of your card balances to credit limits, has the biggest impact here. Less is better, and it is recommended that you keep your card balance below 30% of your credit limit.
  • Length of credit history (15%): People who have been using credit for a long time are considered to be less risky. Your credit history includes both how long you had the oldest credit account and the average age of your credit accounts.
  • New Balance (10%): New credit applications can have little impact on your credit score. It is not important to apply for a loan or credit card once in a while. But if you apply for new credit frequently, it can lower your credit score.
  • Types of credit used (10%): It is best from a credit score perspective to have a mix of credit card accounts and loans. Since this has little impact, don’t feel the need to take out a new loan or credit card just to diversify your accounts.

Why is your credit score important?

Your credit score affects your life in more ways than many people realize. It is important at what time you borrow money or open a credit product. If you are interested in the credit cards with the most benefits, you will most likely want a high credit score. If you want low interest rates on mortgages, auto loans, or any other type of loan, it depends on your credit score as well.

These are not the only situations where your credit score comes into play. Here are more examples of when companies may look at your credit file:

  • Some companies conduct credit checks as part of the hiring process, especially if the job involves handling company funds.
  • Landlords and property management companies check the credit of potential applicants. If your score is not high enough, your application may be denied, or the company may want a larger security deposit.
  • Insurance companies in most states are allowed to use your credit to set your premiums on things like auto and home insurance.
  • Utility companies may want to check your credit and either charge you a deposit or refuse to serve you if you have a low score.

What the ideal outcome looks like – and why it’s not necessary

Several years ago, TransUnion provided information online about what the profile of someone with a perfect credit score of 850 might look like. It wasn’t verified, but here’s what it said:

  • A few credit cards with high credit limits ($10,000 or more) and very low balances on one or two cards at most
  • 1 credit card (a type of card that is paid in full each month)
  • All accounts payable are at least six months old, and at least one is more than three years old
  • There are no signs of disdain
  • Very few credit inquiries from new credit applications (no more than three in a six-month period)
  • At least one installment loan account, such as a mortgage or car loan, is in good standing

But here’s the thing: Nobody needs a perfect credit score. Once you have a 760 FICO® Score, your score is high enough. You can get the lowest interest rates on any type of loan. To confirm this, check out FICO’s Loan Savings Calculator. Credit scores in the range of 760 to 850 are shown to receive the lowest loan rates. Once you are in this range, there is no need to raise your score.

While there are a lot of points that go into a credit score, all you really need to worry about is paying your bills on time and not borrowing too much money, especially on credit cards. If you do those two things, that alone can take you to excellent credit.

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