Finance & Insurance

Know Thy Credit Score

They say knowledge is power, and that couldn’t be more true than when dealing with your personal finances.  A major part of personal finances is your credit score.  Your credit score affects many major events in your life, such as applying for a mortgage or a car loan.  The better your score, the lower your interest rate.  Yet many don’t have any idea what their credit score is.  Knowing this, and how to improve it, can save you a ton of money and financial hardship throughout your life.

 

What is a credit score?

 

Your credit score generally comes from the Fair Isaac Corporation, or FICO.  It’s a number between 300 and 850, the higher the better.  Generally, those with a score of 760 or above will qualify for the best interest rates on loans.  If your score is too low, you’ll end up paying a ton of interest, or even risk being denied a loan at all.

 

What goes into my credit score?

 

It’s important to remember that the matrixes used to determine credit scores vary on your personal history and the type of loan you are applying for.  For example, when you’re applying for a car loan banks will generally consider your past history with paying off car loans more heavily than other lenders.  If you have a short credit history, opening up a bunch of new accounts in a short time frame is going to hurt you worse than someone who has a long, established history.  But in general, these weights are applied to each sector of your credit history:

 

 

  • Highest Weighted: Payment History- This is the singular most important part of your credit history to FICO.  In the past, have you paid your accounts on time?  If so, you’re really helping out your credit score.  If not, figure out how to start doing this to bring your number up.
  • Second Highest Weighted: How Much You Owe- If you owe a lot of money right now, odds are your credit score isn’t looking great.  When using credit cards especially, you want to think about your debt:credit ratio.  If you have a lot of credit extended to you, you’re probably doing all right if you are carrying a balance in small proportion to the amount you could be spending.  If you’re maxed out, your number is being dragged lower.  Installment loans such as car loans are a little bit different.  The further into the loan you are the better your credit score will look as long as you’re keeping up payments, but FICO takes the type of loan into account when figuring out your credit score.
  • Third Highest Weighted: Length of Credit History- How long you have had your accounts open also factors into your credit score.  This means age is your friend.  If you’re young, there’s not much you can do to change this one, but one thing you can do if you’re considering applying for a loan in the near future is to not open up any new credit cards.  Doing so lowers the average age of your account, and will lower your score.
  • Equally Rated (Though at the Lowest Percentage): Types of Credit and New Credit-  New credit doesn’t just lower the age of your account.  If you apply for a lot of new credit at once, it tells lenders that you may be a credit risk.  This is reflected in your score.  However, if you only have one type of credit extended to you, you may want to diversify your lending history.  For example, if you have only ever had a car loan, your score may be helped by opening a line of revolving credit (like a credit card) as long as you use it responsibly, paying it off every month, preferably in full to avoid going into debt.

 

 

What to Do With Your Knowledge

Now you have the information you need to figure out why your credit score looks the way it does.  Before you can apply that knowledge, you have to know what your score actually is.  Check out our myFICO deals to not only find your number, but also to check out their credit monitoring services that notify you if something fishy shows up on your report, which could be an indication of identity theft.