Everyone has had a credit score since they were 18 years of age. This fluctuating number follows you your entire life, sometimes making life a headache. What the three main credit bureaus (Equifax, TransUnion, and Experian) are attempting to calculate when assigning you a credit score is your likelihood as a consumer that you will pay back your loans, credit cards, etc. For instance, if they determine that you may be bad at paying back money which you owe (missed loan payments, lots of debt relative to your income, etc.), you will be assigned a lower credit score. Having a lower credit score makes it more difficult to obtain a loan, and if you do, your interest rate will most likely be unfavorably high.
Is My Credit Score Good?
Credit scores range between 300 and 850, and the average credit score, as of 2019, is 703. These scores are absolute and not relative, meaning that if your neighbor misses a mortgage payment, your score will not increase.
Below is a chart of which scores are generally considered good and bad.
Here’s a little more detail about which types of benefits one receives at and above various credit score thresholds.
- 580 – The cutoff to apply for a 3.5% down payment mortgage through the Federal Housing Authority (FHA)
- 660 – The cutoff for many student loan refinancing programs
- 680 – The cutoff for many debt consolidation loan services
- 700 – A general cutoff to get approved for many credit cards (store cards, some smaller bank cards, some Discover cards)
- 740-750 – The cutoff to be eligible for the lowest loan rates and the best credit cards (i.e. most perks!)
Now, I mention the benefits of using credit cards a lot in my educational videos, like how simply switching from using a debit card to a credit card that earns 2% cash back can increase your net worth by $90,000 over thirty years. Therefore, it should come as no surprise that I try to help boost every single client’s credit score as much as possible.
How to Check Your Score
In the past, the only way of checking your credit score was going directly to one of the three credit bureaus and taking a free trial of their comprehensive credit monitoring service. Of course, their game was that after 7 days, your free trial lapsed and you were charged for a full year of credit monitoring. Now, it’s much easier.
Here are a few sources where you can get your credit score for free any time you want with very little hassle. And checking your score does not impact it.
- CreditKarma.com
- Your credit card’s website. I know Chase, American Express, Discover, and Citi all provide your score
- Your bank’s website. If you do online banking, many banks and credit unions will give you your credit score, updated weekly
- Your tax software. An oddball for sure, but if you use TurboTax or any Intuit product you can retrieve your credit score
What Impacts Your Score
The specific weights have changed slightly over the years, so I’ll post each factor by its relative impact on your overall score
High Impact – Number of late payments, past due accounts, and charge offs
- Making a late payment or missing payments on debt will sharply drop one’s credit score. As such, one should pull all the stops to make sure payments are always made on time. Charge offs, which occur when a company gives up on trying to collect what you owe, are extremely damaging, and can send your credit score over 100 points lower in a matter of days.
Medium Impact – Credit Utilization (Explained Below)
- Credit utilization measures looks at your total credit available and compares it to your credit card balances. In other words, if you have “maxed out” all of your credit cards, this factor will significantly and negatively impact your score. On that note, a quick hack I like to do – before applying for loans, credit cards, or jobs (some employers check your credit score), I pay off all of my balances.
Low Impact – Length of Credit History
- This factor is why the average credit score for an 18-year-old is poor (631). This factor doesn’t matter much after age 25.
Low Impact – Number of Credit Applications Over Last Two Years
- This factor is designed to anticipate one overextending themselves to make big purchases. A credit bureau asks, “why did this person apply for 20 credit cards over the last month? Are they about to make a gigantic purchase?” Overall, this is a low impact factor, and only “hard” credit checks count – looking up your score online does not count as a “hard” check, applying for a loan does.
How to Improve Your Score
Understanding the various components of your credit score above, here are some ways you can improve your credit score:
- Make your loan and credit card payments on time
- Don’t borrow too much
- A good rule of thumb is that less than 36% of your monthly income should go toward debt and housing payments
- Refinance loans to lower your payments
- Use balance transfer opportunities
- There are cards currently available with both promotional 0% interest and 0% balance transfer offers. If you get one of these cards, you will save significantly on interest, which means you are better suited to pay down the principal on your cards. This can lower your debt utilization ratio and thus increases your credit score.
- Seek help
- Of course, I’m here to help clients with this, and there are also non-profit “financial rehab” counselors who can get you on the right path. A Google search should reveal your local counselors. Be wary of “debt consolidation” companies. Their fees can be up to 25% of your debt load.
- Barred from any credit? Get a secured card
- If your credit score is poor, secured credit cards can help rebuild your credit, with a significantly higher chance of approval versus traditional credit cards. They require an up-front deposit which will be used if you can’t pay your monthly bill. Citi and Green Dot are two well known companies which offer secured credit cards.
This information will get you started on the right track to getting more approvals, lower interest rates, and a higher credit score. Of course, if you are overwhelmed by the numbers, tasks, and complexities of putting yourself through credit rehab, let me know and we can come up with a plan together.
Thank you this information is very helpful.