What Is Your Credit Score And Why Is It Important
What Is A Credit Score?
To dispel the first myth, you don't have a single credit score, you actually have 3 or more credit scores! This is because there are three main credit reporting agencies who each have their own slightly different models for calculating credit. The main agencies are Experian, Transunion, and the infamous Equifax. If you are not aware of the Equifax breach, you can read up on it here, and you should also freeze your credit as soon as possible! I grew up listening to Clark Howard, and he has the best resources on how to freeze your credit. Check them out below.
These institutions make their money by selling your financial information to companies over and over again. They calculate your ability to payoff a credit card, car loan, student loan, mortgage, or any other type of loan. The higher your credit score, the lower the interest rate you will pay on the borrowed money. So how do you get a high credit score? Pay all of your bills on time, every single month, and keep your Credit Card Utilization under 30%, and to turbo charge your score, under 10%!
How Can I Track My Score?
There are a few tools that are out there to track your Credit Score safely and consistently. The main one we use is Credit Karma, as well as Credit Sesame. Check them out and decide on which one is right for you! You will need to open your account with them while your credit is not frozen, and then proceed to freeze your credit once your account is created.
Why Is My Credit Score Important?
The better your credit score, generally, the better the rates you will be able to get on loans that you take out. So when you go to your credit union with a prime credit score (>750) and are able to get a 2% loan, while a subprime borrower with a 550 credit score will likely receive a rate greater than 10%! Compounded over the life of a loan, that can result in hundreds if not thousands of extra dollars! Check out this graphic from Experian which highlights the percentage of Americans in the different credit score bands below.
How Are Credit Scores Calculated?
Amounts Owed/Credit Utilization Contribute 30% To Your Score!
This is also known as your credit utilization ratio. You can calculate your utilization ratio by adding up all of your credit card debt, and diving it by your total credit limit across all of your credit cards. You benefit by keeping this percentage under 30%, but if you are looking to turbocharge your score, keep this number under 10%! This means if you have 4 credit cards, with total available credit of $50,000, you should never charge more than $5,000 on those cards in any month. This is viewed across all credit cards, and not typically on a single credit card. If you run high percentage balances with a single issuer (Chase, Citi, etc) they may take proactive measure to reduce your credit limits, or close your cards entirely. Never charge in a month more than you can pay off at the end of the month.
Payment History
Can you believe a full 35% of your credit score is entirely dependent on paying your bills on time? This is both the easiest and the hardest aspect of your credit score to control. You can technically have a 100% on time payment record for paying just the minimum required towards your credit card balance every month, but if you are an avid follower of the Marriage Money Blog, you know minimum balance are swear words in this house! Seriously though, just pay your bills on time, every month, and 35% of your credit score makeup is nearly perfect!
Credit Mix, Length of Credit, and New Credit Contributions
The last 35% is made up of your overall credit mix (The different types of credit), the length of your credit history, and any hard inquires (Applications for credit). As you can see, if you take ownership of your first two credit spheres of influence (Credit Utilization and Payment History), the remaining items will be a piece of cake!
How Can I Boost My Score?
There are a number of services out there that promise to raise your score if you only pay them $75.95 for their service! You should never, not ever, pay a company to help you raise your credit score! Now that you know the basics of how your score is calculated, you should be able to answer this question yourself. How do you boost your score? Reduce your credit utilization to under 10% and have pay all your bills on time. You do those two things, and you will increase your credit score dramatically!
So What Is Next?
You should take the following steps now that you are a credit score expert!
- Register with Credit Karma and/or Credit Sesame
- Freeze Your Credit
- Pay off debt to reduce your credit utilization under 10%
- Snag your copy of our 7 most important marriage conversations!
Once you complete the above, your credit score can rebound substantially over the next 3-6 months!
