I can’t tell you how many young professionals and college students I’ve met who really don’t know what a credit score is.  Sure, they’ve heard it on about a million car commercials, but it just sounds like something only grown ups worry about.  Well as sad as it is, we’re all grown ups at some point.  Here is what you need to know about your credit score.

What is a credit score?

A credit score is a three-digit number derived from detailed information about your credit history, and it can be one of your most valuable assets.   Most lenders use to determine your credit risk, meaning how big of a risk you are paying back the loan.  Credit scores affect the rate of interest you pay on your loans (car loans, home loans, privately consolidated student loans, credit cards, etc.). The higher your credit score, the less interest you pay each month and overall.  Less interest paid each month means more money in your wallet! It pays to be responsible.

The FICO score is the best know and most widely used credit score.  A FICO score ranges from 300 to 850. The higher the number, the better.

How is my credit score calculated?

Your credit score is calculated off the following five attributes:

Payment History (35%) :

Credit Card Payment History – This includes your credit card and any store credit cards payments (yes, even that pesky little Victoria’s Secret credit card you signed up for at age 18 to get 20% off that purchase that one time)

Public Records and Collections – Bankruptcies, lawsuits, foreclosures, liens, judgments… aka not fun stuff at all that you should avoid at all costs.

Late or missed payments on bills – Set an alarm, highlight the day in your planner.  Don’t forget to pay your bills every month by the due date.  Late payments mean you usually get a late fee and after a certain amount of time, it also can hurt your credit.  This includes your cable bill, utilities, car payment, etc.

Amounts Owed (30%) :

Number of Accounts and how much owed on each – Don’t go out and get 3 new credit cards and max them all out during the Lilly P After Party Sale. Credit card money is still money you have to pay.

Credit Line Utilization – Percent of total credit line being used. Get a couple credit cards, use them once a month, and pay off the balance each month if you can.

Balances remaining on Installment Loans: An example of an installment loan is your car payment.  Pay it every month.  As your percentage of the amount you owe on the loan goes down, the credit score will more than likely improve, depending on other attributes.

Length of Credit History (10%) :

The age of your accounts and how often they’re used.  

New Credit (10%) :

New accounts – number of new accounts, new accounts added too rapidly, percentage of old accounts to new accounts

Recent inquiries – When you rent an apartment, lease a car, buy a car, buy a house, etc., they more than likely run your credit to see how big of a risky devil you are.  This is an inquiry.

Time span  – Length of time since your last inquiry and length of time since a new account was added.

Account Diversity (10%) :

Diversity of debt – Installment loans, credit cards, mortgage loans, etc.  Diversify. Diversify.  Diversify… but don’t open up more accounts than you need.

How do I find out my credit score?

There are many websites out there that will give you a free credit report and score every year. Often times, credit card companies will also offer it in their services. Give it a Google.

I just checked my score and I have no score? What’s wrong with me? 

More than likely one of two scenarios

1) They can’t find you.  When you try to get a copy of your credit report online, you have to enter information like your name, date of birth, mailing address and social security number. This information is used by the credit bureaus to help match you with your credit report.  If you’ve moved several times or changed your name, it can be hard to locate the correct report for you. Credit reports can contain errors. If your name or address is misspelled on your credit report, the credit bureau may not have been able to find it.

2) You’ve never opened up a credit account.  Credit reports document your history as a borrower. You don’t have one until you’ve opened your first credit account (credit card, car payment, mortgage). If you’ve never had a credit card, auto loan, mortgage, student loan, personal loan or other line of credit, you won’t have a credit score or report.

What’s a good credit score? 

It really depends, but here are some ranges:

850 – 750: EXCELLENT

749 – 700: GOOD

699 – 640: FAIR

639 – 580: POOR

579- 350: VERY POOR

Credit scores are important.  Pay attention to yours, check it annually and try to maintain a good one.  You wouldn’t lend a shirt to your friend who has a history of staining it or never giving it back, right? Don’t be “that friend” with your credit.

Amanda O