“Really, credit scores are not that hard,” said the suited Bank of America guy whose job it was to understand credit scores. “The thing you have to understand is that it’s not necessarily about how responsible you are or aren’t – it’s about how much money the bank can make off of you.” As newlyweds in a new town, this was the first thing anyone had said to me about adult life that made enough sense I could trust it.
The man then went on to explain that he had several credit cards, all of which he juggled with a tiny balance on each to maximize his score, at which point we fled the bank and began stashing our money under the mattress. But it doesn’t have to be that complicated.
What Is a Credit Score?
The bank guy was right about one thing – a credit score helps lenders know how much of a risk you are or aren’t, and the higher the score, the better. A company called FICO (at least, it’s usually FICO) crunches numbers about your credit history from credit bureaus like Experian, TransUnion, and Equifax to give lenders a number that tells them how risky it is or isn’t to give you money.
What Shows Up on Your Credit Score?
A lot of things can influence your score. Over a third of it is “payment history.” That really has to do with whether you have bankruptcies, late payments, foreclosures, and other things like that. If your history of paying off bills and credit cards has been boring, you’re good here. Another 30% is “amounts owed.” People tell you that this is about your credit card debt/limit ratio, but that’s not really all there is. They also look at how many people you owe money to, whether you’re rotating through a bunch of credit cards, and how much you’ve paid off on any loans you may have.
Another 15% has to do with how long you’ve had a credit history. The longer you’ve had some kind of credit card, the better off you are. (Though you can still have relatively good credit if you’re new to using credit, provided the other things are in good shape.) Credit mix makes up 10%. If you have loans and credit cards, and you’ve used them both responsibly, that’s better for your credit score than just having one or the other. New credit makes up the last 10%. If you open a bunch of accounts in a short span of time, that looks a little shady.
What Does a Good Score Look Like?
The scores are spread across a scale from 300-850, because that makes sense, right? What a “good” score looks like depends greatly on the specific situation. “Good” credit has been defined as anything above 700. According to Finance Shouter Jim Cramer, the average score right now is around 695. Anything below 600 is generally not great.
What Does it Do for Me?
If your credit score is good, you might find yourself with lower rates on loans or credit cards. You’ll get decisions back faster when you make an application involving a credit decision. If it’s bad, you may find yourself paying high fees, for instance, to start up cell phone service. If that sounds like you’re paying a tax for being poor, well, you kind of are. From the lenders’ perspective, they’re trying to mitigate the risk that they might be lending money out they’ll never see back. The good news is that there are ways to improve your score.
How Can I Improve It?
The simple answer? Check your credit report. Each of the three major credit bureaus – Experian, Equifax, and TransUnion – has to give it to you for free, once a year. You can also get a report from CreditSesame.
Don’t sign up for a bunch of credit cards through stores just to use the initial discount they give you. Opening up a ton of cards hurts you. Don’t let things like medical bills or parking tickets go unpaid.
If you use a ton of credit – even if you pay that balance off right away – that can hurt you. Remember that a credit card stays on your file for ten years. (Unless it’s negative, in which case it only stays for seven.) Get one “line of credit” – usually just a credit card – and use it responsibly, and pay it off regularly. Even things as small as that can help you build good credit.