It’s all about the numbers.
Practice good credit habits and understand what a credit score is and where it comes from, and you will be well on your way to a healthy credit score journey.
A credit score is a number that is meant to reflect your creditworthiness; how well you borrow and repay money. Your exact credit score will depend on the scoring system you consider. The most prominent system is known as the FICO score. FICO scores range from 300 at the lowest over 800 at the highest, with scores below 640 considered poor and anything above 700 considered good.
Over 90% of America’s top lenders and creditors refer to FICO when they evaluate potential clients, making this number highly important to finance management. Other scoring systems do exist, but they are not as commonly used.
All credit scoring systems share something in common: a connection to certain aspects of your credit history.
Companies called “credit bureaus” apply complex models (such as FICO) to what they know about your financial records in order to generate a single number, your credit score.
Let’s have a look at what these factors mean, and how you can improve your financial health through each one.
Payment history is a record of how well you’ve handled credit dues in the past. A clean record is best, showing that you’ve paid everything on-time and in full. Avoid missing payments or making them late, as that will lower your credit score.
Credit utilization is the degree to which you are using the credit which is available to you. For example, if you’ve taken out $1,000 on a credit card with a $5,000 limit, you have a 20% utilization rate on that account. Try to keep this number low (30% or less) to show credit bureaus that you can exercise fiscal restraint.
Length of credit history refers to how much time has passed since you first began using credit. Having a long credit history gives you a better chance to prove your trustworthiness, though even a substantial track record can generate a low credit score if you fall into bad financial habits.
Credit diversity has to do with the types of credit that you own. A loan, for example, gives you a different type of credit than does owning a credit card. Boosting your credit diversity demonstrates an ability to responsibly manage multiple accounts and therefore boosts your credit score.
New credit comes into play when you acquire a lot of new credit in a relatively short amount of time. This kind of behavior signals to credit bureaus that you may be short on cash and, as a result, have trouble paying dues in the future. Thankfully, the damage that too much new credit can do to your score usually reverses itself within a few months if you stay on top of payments.
If you’re curious to see how your credit score is doing, you can check this important number in a variety of ways. Credit card and loan statements sometimes include your credit score, and many apps will show you a FICO or alternative score at little or no cost to you. You can also talk with a financial counselor, who will have the authorization to request your score from a credit bureau.
Credit scores are critical to many activities, from borrowing money to renting an apartment. Hence, keeping an eye on yours is a great step in the direction of fiscal health. Now that you know the fundamentals of this important number, you’re ready to take managing your finances to a whole new level.
