Your credit score is one of those key metrics that stick with you throughout your entire life, so safe to say, it’s fairly important.
Before we go into the ins and outs though, you need to understand what a credit score is and why it’s important.
What Is a Credit Score?
A credit score is a number that is used to quickly sum up information from your credit report in a single numerical digit. The higher the number, the better, with most scores falling between 300 and 800. Lenders use credit scores when deciding whether or not to give you a loan or a credit card, as well as what interest rate to give you.
On top of that, certain companies use the score when it comes to their hiring process, including whether or not to hire you or to offer you housing, auto insurance, or any other relevant job-related perks.
Who Calculates My Credit Score?
The corporate entity responsible for maintaining your credit reports, and thus your credit score, differs from region to region. In the United States, there are three main players: Experian, TransUnion, and Equifax.
These companies consolidate all relevant public information with regards to your finances into a singular report. This includes things like loans and credit cards, bankruptcy, and any current financial obligations you have.
Most peoples’ credit histories are massive, and it only grows with age. It would take lenders ages to read through it all, and one would be likely to miss important information. Due to this, a computer-automated system was devised to scan your history and deliver that information and your financial situation in one easy to understand number.
How Many Credit Scores Do I Have?
There is actually more than one type of credit score, but the two major ones are VantageScore and FICO. Your score with both of these types also varies depending on which bureau supplies the information, as no one has identical records. On top of this, there are different types of VantageScore and FICO credit scores for different purposes. Lenders use different metrics for car loans, or for mortgages, and so on. Alternatively, a lender may even have its own in-house credit score system that uses neither of the industry standards.
If that wasn’t enough, the FICO and VantageScore models change and update over time, and the wider world generally doesn’t catch up until some time after. For example, the most recent version of FICO may be FICO 9, but companies could still be using FICO 8 for some time regardless.
All of this means that you have tons of different credit scores, depending on what for and where you look. It can get complicated, but each should fall in the same ballpark. To save yourself the headache, just pick one of the major two models and go off the most recent version.
How Can I Raise My Credit Score?
So now that you have a feel and some understanding of what a credit score is, let’s look at some ways of influencing it.
It’s important to note, your credit score constantly changes, as in on a day-to-day basis. Your score is almost never the same from one day to the next, so most little things you do with regards to loans and money affects it regardless. So as a general rule of thumb, if you want the score to go up, start off by being smarter with your money.
Your credit score is made up of various different factors. This should leave you guessing as to what influences it the most, but thankfully that isn’t the case. Both FICO and VantageScore have released the makeup percentages of your credit score.
With FICO, the model looks something like this:
- Credit mix: 10%
- New Credit: 10%
- Payment history: 35%
- Credit utilization: 30%
- Length of your credit history: 15%
VantageScore uses a different modeling system:
- Balance: 6%
- Available credit: 2%
- Payment history: 41%
- Credit age/mix: 20%
- Utilization: 20%
- New credit: 11%
These fancy industry terms are all well and good, but what does each mean?
This one is pretty self-explanatory. Your credit score’s whole purpose is to allow people to determine whether or not you are going to pay back a loan. If you have a history of late and non-payments, it’s going to drag your score way down, and unfortunately, there’s no way to change the past, so make sure you’re paying your bills on time.
Utilization, Available Credit, and Total Debt
It’s a no brainer that the less you owe, the more likely you are to be able to pay off a new loan. A credit utilization ratio is a measure of how much of your total available credit is in use. The more you’re using, the worse the ratio. If you want to drive this down and your score up, avoid going nuts with any credit cards. Keep it between 10-20%.
Length of Credit History
If you have proven track records of loans being repaid on time, chances are, you are going to continue that trend. They will look at the age of your oldest and newest accounts. To rack this up, make sure you’re paying things on time, and consider taking out loans periodically that you know you can pay back in order to drive up the score. Also, be wary about closing old accounts, like credit cards, as positive accounts that go far back also help to increase your credit score.
A credit mix refers to the different types of loans you have taken advantage of in your lifetime, like mortgages, credit cards, student loans, etc. This allows lenders to see just how well you handle different types of loans, so diversify the loans you’re taking as time goes on. HOWEVER, do not take out loans just to increase the score of your mix. It isn’t that important, and the debt certainly isn’t worth it.
If you open a new credit account, that tells lenders that you may be facing financial troubles, which drives down your chance of getting a loan from them. The less you’re asking around about loans in recent memory, the better.
How Do I Know If My Credit Score Is Good?
Nearly everybody’s credit score is between 300 and 850, so that’s the general range that can be commentated on. Both FICO and VantageScore have different metrics for each range, so each can be summed up as follows:
- 800+: Exceptional
- 740–799: Very Good
- 670–739: Good
- 580–669: Fair
- <580: Poor
- 750-850: Excellent
- 700-749: Good
- 650-699: Fair
- 550-649: Poor
- <500: Very poor
How Do I See My Credit Score?
It’s not as difficult as you might expect, although you might have to pay to see it. Some bureaus offer it for free, others as part of a paid service.
If you don’t feel like coughing up money to a bureau, then you do have some additional options available to you.
Some credit card issuers offer customers free credit scores, so contact yours to inquire about one. You could also just go ahead and ask the lender what it is when you’re applying for a loan. Certain credit counselors may be able to provide you with a credit score. Lastly, VantageScore has a list of partners that offer credit scores for free, while you’re going to have to buy your FICO score from a bureau.
That’s just for your credit score, though. If you remember, your credit score is generated from your credit report, and your credit report, on the other hand, has to be supplied to you by a bureau under federal law if you ask for it.
This is the much smarter option, especially if you’re actually looking to improve your credit score, due to the fact that the score itself doesn’t tell you anything specific.
You can get your credit report and analyze it and see how it has developed over time. You can look for negative trends in your financial habits, and work on improving them going forward.
On top of that, doing this allows you to see any errors that may be in your report with relevance to your credit history. You can fix these errors, which should make the report, and your score along with it, more accurate.
If you do notice an error and decide to go about fixing it, you have two ways of doing so. You can fix the issue with the credit reporting agency itself, or you can go further back and resolve it with the creditor that reported it in the first place.
If you want to fix it with the agency, you’re going to need to do some preparation, notably how it works and what information it stores. After that, you need to get any evidence in order that proves that the credit report is wrong. Make sure you’re making copies of every single document, and don’t give away the originals.
Once that’s done, you need to draft up a letter to the agency, including all relevant documentation and evidence, as well as your full name, your date of birth, and your Social Security Number.
You are also going to need to provide any past addresses or past names you’ve gone by. You’re also going to want to include details of the creditor and the account. Lastly, tell them what’s wrong and how to fix it.
The agency is legally required to investigate legitimate claims within a window of 30 days and fix the error if it is found to be false. After this period has expired, the agency should inform you of the result.
For fixing it with the creditor itself, send the same letter and evidence to them as you would the agency, then after about a month, follow up with them via email or phone call to see what action it has taken.
It’s worth keeping in mind, even if you don’t have evidence, if you see something wrong, still report it to the agency. It has to investigate the claim, and if it finds something you couldn’t, then your report is still going to get fixed.