Understanding Credit: A Score that Impacts Everything from Your Cell Phone Bill to Car Insurance
Having a good credit score can get you approved for financing as well as better rates and higher credit limits. Your score can help determine if you will be approved as well as how much you will pay for a car loan, insurance, mortgage, cell phone with a plan, or credit card, among other things. It can even be a determining factor when applying for some jobs.
What is a Credit Score?
A credit score determines your creditworthiness and ability to manage debt responsibly. It is generally based on your credit report, or reports, from any of the major credit bureaus. A higher score comes from having a longer credit history that includes paying your bills on time and working towards paying off debt. A lower score may include late payments, charge-offs, or a short credit history.
- Federal Trade Commission: Credit scores
- State of New Jersey, Department of Banking and Insurance: What is a credit score?
- Federal Deposit Insurance Corporation: Credit report basics
Who Calculates Your Credit Score?
In the United States, your credit score is calculated by Experian, TransUnion or Equifax, which are the three main credit bureaus. They base it on the information that they collect for your credit report. That information includes money you have borrowed and any credit accounts that you have open as well as any liens or judgments. It does not include employment or criminal history.
- Federal Reserve Consumer Help: Credit reports and scores
- Skyline College: Credit report review and credit score
How is Your Credit Score Calculated?
The primary type of credit score is the FICO score. The general-purpose score can be anywhere between 350 and 800, but an industry-specific score (such as those used by mortgage lenders) may have a range from 250-900. The quality of your payment history makes up approximately 35% of the score. Your debt level makes up the next 30%. The length of your credit history is 15% of your score, inquiries are 10%, and the type of credit mix that you have makes up the final 10%.
- Minnesota Commerce Department: Understanding your credit report
- New York State, Department of Financial Services: Understanding your credit report and your credit score
- Oklahoma Public Employees Retirement System: Understanding your credit score
When is Your Credit Score Used?
Your credit score may be used when you apply for anything that includes lending, financing, or trust. Credit scores have been used by potential landlords, mortgage lenders, credit card companies, insurance companies, the government, banks, credit unions, human resources departments, mobile phone companies, and more. In addition to having your credit score checked when you first apply for these things, in some cases, lenders may continue to evaluate and check your creditworthiness before increasing or decreasing credit lines.
- State of Michigan: Credit reports and credit scores
- Mississippi Insurance Department: Credit scoring: How does it affect you?
How to Build Your Credit
There are many things that you can do to improve or build your credit if you don’t have much of a credit history established yet or if you do but it’s more negative than positive.
- Apply for a secured credit card
- Get store credit cards
- Have someone make you an authorized user on their credit card or line of credit
- Get a cosigner to help you get a credit card or loan
- Make your payments on time
- Use credit responsibly
- Pay more than the minimum on your credit cards
- Keep accounts open to establish a longer history
- Check your credit reports regularly for inaccurate information
- Hampshire College: Steps to help build a solid credit history
- Florida’s Center for Child Welfare: Creating a credit profile: How to build your credit
Establishing Credit History
Teens under 18
It’s possible to start building, or preparing to build, your credit score before you are 18. Here are a few things that you can do to get started:
- Get a job so that you can meet the income requirements for a credit card
- Open a savings or checking account to begin to establish a banking history
- Have a parent add you as an authorized user on a secured credit card
- Learn good financial habits early on to avoid making mistakes
- Apply for a credit card, student credit card, or secured credit card that you are most likely to qualify for
- Apply for a store credit card
- Avoid applying for too many credit cards at the same time. Too many inquiries can temporarily damage your credit score.
- Make payments on time
- Keep a low balance on your credit cards
- Pay on time
- Get a loan
- Stop Fraud Colorado: Why is having good credit history important?
- California State University Channel Islands: Credit score 101
Monitoring Your Credit Score
To get free government-authorized annual credit reports, visit annualcreditreport.com. To see your score and reports more frequently, visit Experian, Equifax, or TransUnion online and sign up for one of their credit monitoring services.
- AnnualCreditReport: Main page
- Consumer Financial Protection Bureau: Where can I get my credit score?
- gov: Credit reports and scores
Managing Your Credit
To manage your credit, begin by making sure that the credit cards you have provide the lowest interest rates for your financial situation. In some cases, it may make sense to transfer the balances of high-interest credit cards over to low-interest ones. Try to avoid cards that come along with annual fees or other hidden expenses. In addition, make sure to pay your bills on time to avoid late fees and having your interest rate increased.
Be sure to check your credit report often. If you find any discrepancies, contact the credit reporting agency to have them removed or adjusted.
Always pay more than the minimum on your cards and try not to use them except when necessary. Maxing out your cards may result in a lower score and harder to control debt. Making good choices now will pay off in the long run with an improved score and more manageable finances.
- University of Georgia: Understanding your credit score
- University of Colorado: Credit score management seminar
Repairing Bad Credit
Repairing credit can take time, but it is possible. Start by setting payment reminders to avoid any future late payments. Always pay more than the minimum and begin to work on paying off debts rather than moving the debt around. In some cases, it may make sense to tackle smaller debts first and then move on to working on the larger sums.
If you are still struggling, consider speaking to a credit counselor or claiming bankruptcy, depending on your situation. While bankruptcy will damage your credit score, it also gives you a chance to clear out many of your monthly debts and start over, hopefully, more wisely the second time. It’s never too late to start actively managing your credit score.