Oh, credit scores. A necessary evil in the adult world and something that nobody actually teaches us about. A credit score is your password to unlock all sorts of financial opportunities. Your credit score can help you get a car loan, get approved for an apartment or a mortgage, and buy a killer rental property with lower interest! I’m here to help you understand just what a credit score is and how you can repair bad credit or improve your decent credit!
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WHAT IS A credit score?
A credit score is a number that ranges anywhere from 300-850 that is used by all sorts of companies (car companies, banks, government agencies, etc) to decide if they should give you a loan. They use this number to determine the probability that you will actually pay back the money you owe them.
Banks and other lenders want their money back. Nobody is in the financial sector to lose their money. This is why people who are less of a chance of paying back their loans get higher interest rates, if you’re eventually going to default on the loan, the company is still able to get some money out of you through the interest you pay monthly.
You need to think of your credit score as a level of trust a bank has in your ability to pay back your loan entirely. There are 5 ranges that you can be in for your credit score, they range from bad to excellent. The goal is to see yourself in the top two sections if you want a lower interest rate!
WHY IS YOUR credit score important?
Unless you’ve got tons of family money, loans from a bank are just going to be a regular part of your life. You’ll need car loans, or a mortgage, maybe even a line of credit. Having a good credit score can drastically improve your life because companies are going to be willing to give you a lower interest rate which can give you more money to spend on things you want and investing to make yourself more money.
WHERE CAN YOU SEE your credit score?
Let’s be real, I’m cheap. I don’t want to waste money on anything that I can find somewhere for free. This is why I’m such a big fan of credit karma. You just have to enter your basic information into the website and Credit Karma will calculate your credit score based on all the information out there. This is called a soft inquiry, credit karma doesn’t actually make your credit score decrease everytime you check it like some places. Any time you apply for a loan, there’s a hard inquiry on your account and it will take a hit to your credit score.
HOW IS YOUR credit score calculated?
Your credit score is made up of 5 categories that all make up a different piece of the credit score pie:
- Payment History
- Total Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit
So, now let’s go into what the 5 factors of credit are all about!
This factor is the most straightforward of the bunch. Payment history refers to whether or not you’ve paid your credit cards/loans/mortgage on time and in full. It takes into account your entire payment history. It includes the ratio of on-time to late/missed payments, collections that are against you for unpaid credit, as well as liens, bankruptcies, foreclosures, etc.
TOTAL AMOUNTS OWED
The total amounts owed is all about your credit utilization and the total amount of money you owe on credit. Your credit utilization is how much of your available credit that you’re using. For example, if you have a credit card with a $1000 limit and you have $975 of charges on that card, your credit utilization is going to be 97.5%. This is seen as negative in the eyes of a lender because they will see this as irresponsible and may think you won’t be able to make your minimum payments as regularly.
LENGTH OF CREDIT HISTORY
The longer you’ve proved that you’re able to handle credit, the better your credit score is going to be. Obviously, this percentage of your credit score is going to just increase as you age which is unfortunate for those of us that are young. This is a big reason why it’s super recommended to start using credit when you turn 18 and have it available to you!
Every single time you apply for credit, there is a “hard inquiry” on your credit score. This means that every single time you apply for a credit card, a car, a mortgage, etc. you’re going to have a small decrease in your credit score. Pretty big bummer, but it’s how it works.
TYPES OF CREDIT USED
Creditors want to see that you don’t just have 10 credit cards. They want you to look like a well-balanced human! They want to know you’re borrowing responsibly and not just racking up credit card debt.
TIPS TO IMPROVE your credit score
It may sound super daunting to try and improve a bad credit score but it isn’t impossible. There are seriously easy things you can do to improve your score and get in that coveted 800 credit score club. (Full disclosure, even I’m not in the 800+ club, but I bet I will be soon hehe).
PAY DOWN (NOT OFF) YOUR BALANCES
This one is often a bit controversial. There are a lot of financial people out there that say you should just pay off your debt completely because why would you ever want to carry it from month to month? Well, a 0% credit utilization score isn’t actually seen as favourable to a lender because that means they make no money. So, you want to keep your utilization to around 30%! This means that if you’re limit is $1000, you want to carry a balance of around $300 or less month to month.
DECREASE YOUR UTILIZATION
There are two ways to change your utilization, but seriously I only suggest the second. The first way is to increase your credit limits. This means if you have a credit card with a limit of $1000 but you have $900 of charges on it your utilization is 90%, but if you get it increased to $5000 then your utilization will only be at 18%. The downside to this is that many people feel like they have more money available to them when they increase their credit score. Let’s just remember that this is money that you’re borrowing, the money isn’t yours and you have to pay it back. The second option to decrease utilization is so pay down your balances like I said! It may take time but it’ll be worth it.
KEEP UNUSED ACCOUNTS OPEN
Even if you don’t use a credit card, it’s a good idea to keep it open. Even if you have a 0 balance, having a credit card open is going to keep your length of credit history longer! You can do a thing where you just charge a very small amount on the card every month and pay the balance off without a problem!
AVOID HARD INQUIRIES
If you need credit, don’t apply to 10 accounts all at once. It’s never a good idea! Every time you apply it’s going to ding your credit just a little bit and by the 10th card, there’s a very low chance that you’ll even be accepted. Unless you know you’ll be accepted into whatever you’ve applied for, don’t apply.
USE A SECURED CARD
If you have really really horrible credit, your only option may be a secured credit card. A secured card is given out by a bank with you paying an amount of money up front. This money is usually the same as the credit limit amount on the card. The lender is going to use this money to pay off your balance in the chance that you default. Secured cards are a great way to increase your credit slowly, but surely. It’s all about small changes in the right direction!
TRY NOT TO MOVE
This is one of those things that people don’t usually know about their credit score. Your recent addresses are all going to appear on your credit report, if you’re moving every few months or even every year, the lender is going to see that when they pull your credit score. This means they are going to see you as less trustworthy because they’ll assume you were unable to pay rent and that you were evicted.
I hope you’ve learned something about the importance of your credit score and how to fix it. Thank you so much for reading and supporting me at Not Quite an Adult. Please feel free to comment below with any tips you think I missed, or about your success stories in increasing your credit! I’d love to hear from you <3 xo Taylor.
Hey! My name is Taylor O’Halloran and I’m a huge fan of saving money any way I can.I’m obsessed with dogs and I love all kinds of cheese even though my stomach hates it. I’m a recent university graduate who just wanted to do her own thing and see what happens! Follow me on the journey!