Your Credit Score and A Better Financial Life

Credit score and credit reports…does this bring a sense of dread and confusion? Does it feel like you need a better understanding of how credit works? Let’s demystify credit so we understand what scores mean and how we can understand our report more in depth and maintain the best scores over time.

There are 3 main credit bureaus that give the 3 score ratings for your credit history: Transunion, Equifax and Experian. They independently analyze your accounts, credit history, payments, credit limit, etc to assign a credit score which in turn helps lenders make decisions about your creditworthiness. These scores can differ because not all lenders report to all three bureaus plus they each use a bit of a different scoring model. 

When lenders review your scores, for mortgage lending they use your mid-score as the qualifying score. Other loans such as auto loans and credit cards may only pull one specific score. For example, I was applying for an auto loan and they only pulled my Transunion score to determine my credit worthiness.

Let’s discuss the numbers and what they mean:

Below 580: Poor

Fair: 580-669

Good: 670-739

Very Good: 740-799

Excellent: 800+

These scores can determine if you qualify for a loan or a credit card and they determine what kind of rate you’ll get when borrowing. The better the score, the lower the rate.

To determine your score, the bureaus will look at your history of timely payments, how long you’ve had the account open, what your credit limit (max) is versus what the balance is, credit mix (installment loans, mortgage loans, credit cards) and new credit. All of these items contribute to your credit scores.

The best advice for good scores:

-Always pay on time. Set up automated payments if needed to make sure a payment is never late.

-Don’t open a bunch of new accounts. Each credit inquiry hits your score a bit.

-Never let your accounts go to collections. Work out any payment plan necessary with the creditor so the account is not reported negatively to the bureaus.

-Maxing out credit lines will lower your scores. A widely used rule is the 30% rule. For example if you have a credit limit of $5000 on your credit card, keep the balance owed less than $1500 for the best scores.

There are many things to discuss in regards to credit scores and hopefully this touched on a few things to lead you in the right direction to help you improve or maintain your scores. I’ll definitely revisit this topic in future blog posts. 

I hope this information was helpful!

All the best to you on your financial journey,
CK