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Credit Score

By Edward Zhao

What is a Credit Score and How Does it Affect You?

Much like how we receive a grade for our work, a majority of adults have their own credit “grade” called a Credit Score, which is based on a scale system ranging from 300 to 850. This number is what lenders use to predict how likely you are to pay back a loan on time, where a lower value means you are less likely, and a higher value vice versa. According to the FICO scoring chart: 300 to 579 is a poor credit score, 580 to 669 is a fair credit score, 670 to 739 is a good credit score, 740 to 799 is a very good credit score, and 800 to 850 is an exceptional credit score. Companies will use a person’s Credit Score to determine whether they will offer credit cards, loans, or even mortgages to their customers. Additionally, a higher credit score usually allows for higher limits on your credit card, better interest rates, and easier qualifications for a loan.

How exactly is Credit Score calculated?

Your Credit Score is determined through the information in your credit history or credit report. An individual’s credit report consists of a variety of different factors. According to the Consumer Financial Protection Bureau, an agency in the financial sector of the United States government, some of these factors include:

  • Bill-Paying History (35%): How often you have made payments on time

  • Credit Utilization and Debt (30%): How much unpaid debt you currently have across all your accounts and how much credit you are using compared to your available amount

  • Credit Mix (10%): The number and different types of loan accounts you own

  • Credit Age (15%): The amount of time you have had your loan accounts open

  • New Credit Applications (10%): The number of times you have applied for new credit

All these factors can influence your Credit score as a way of measuring your credit responsibility, which allows for a rise or drop in your score.

Where Can You Check Your Credit Score?

Your Credit Score builds when you begin to use a form of credit, usually after turning 18, when opening a credit card in your own name. Before having a credit history, there is no credit usage; therefore, an individual does not have credit, also known as credit invisibility. However, once your credit history begins to form, following the different factors mentioned earlier, your score will start to appear. Subsequently, you may find yourself wondering how to even check your own Credit Score. This can be done by visiting a free credit scoring website, viewing it through your credit card provider, and asking for a credit counseling service. A few of the top free credit score reporting websites are Credit Karma, Annual Credit Report, and Credit Sesame.

How to Improve or Maintain Your Credit Score

By now, you have learned what a Credit Score is, what factors affect your score, and how you can check your own. To improve your score, here are some tips:

  • Review Credit Reports: Most importantly, when checking your Credit Score, make sure there are no signs of mistakes and identity theft that are unintentionally lowering your score. Review your accounts and keep track of unpaid balances.

  • Pay Debts on Time: Your bill-paying history plays a significant role in influencing your credit score. By paying back debts on time and in full whenever possible, and avoiding late payments, you can help raise your credit score. This can be done by keeping track of your unpaid bills through a calendar and setting reminders, paying more than the minimum and more than once a month, and paying off your most expensive loans first.

  • Low Credit Utilization: When borrowing money, keep a low credit utilization rate. Typically, this is done by only using 30% of your available credit by reducing your spending or applying for a credit limit increase.

  • Limit New Accounts and Maintain Old Accounts: Frequently applying for new credit accounts can lead to hard inquiry, which in turn, could negatively impact your score. Instead, limit the number of new accounts you open and continue to maintain your old accounts, even if the debt has been paid off. This will increase the length of your credit history and boost your own credit score.

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