Do you ever feel like trying to understand your credit score is like reading a road map through a rain cloud? One minute, you think you have a handle on it; the next, an onslaught of information threatens to wash you away. We get it — knowing the difference between revolving and installment credit, what FICO is, and why having a 700+ credit score is a big deal can get confusing!
It’s important to know your credit score is not just a number. It's the key that unlocks financial services, from loans to credit lines. Without a good credit score, these doors may remain closed. But don’t worry! In this guide, we’ll walk you through everything you need to know about credit and demystify the roadmap along the way.
Who uses your credit score, and how do they use it?
Lenders of auto loans, home equity lines of credit, mortgages, credit cards, and more use your credit score to evaluate your creditworthiness. Most credit scores reflect the risk a lender takes by lending money to you or providing you with a service. Generally, the higher your credit score, the less risk you represent.
The Big Three Bureaus and Credit Reports
If you’ve ever heard someone talk about one of the three credit bureaus, they’re talking about Equifax, Experian, and TransUnion. These three bureaus record your credit history and score and report them to credit issuers and lenders when requested.
If you’ve ever applied for credit, you have a file known as your credit report. These reports include where you live, how you pay your bills, and if you’ve ever filed for bankruptcy. Bureaus gather information for your credit report through creditors, such as loans and lines of credit, and public records, such as property or court records.
The big three credit bureaus create and manage your credit reports and send them to businesses with a legitimate need for your information. Insurers and employers use your reports to see how you manage your financial responsibilities. Lenders use them to see if they should provide you a loan and under what terms.
It’s important to note that your credit score will vary from bureau to bureau due to how they report and use the data they gather. However, you can get one free credit report from each bureau every 12 months. Credit reports are the basis of the credit scoring system; it’s important to be sure all of your information is current and otherwise correct. Errors should be reported to the company reporting the information or can be disputed on most credit monitoring systems, like our CreditSense, or with the credit bureau.
Credit Scoring Models
There are many different credit scoring models, and their use usually depends on the credit provided. However, the oldest and best-known credit scoring model is FICO. FICO’s credit scores range from 300 to 850 — the higher, the better! Here’s a break down of what makes up your credit score:
- Credit payment history
Credit payment history makes up 35% of your score, the largest portion, and factors in how many on-time payments you’ve made and how many late payments you’ve made. - Outstanding debt
Outstanding debt makes up 30% of your credit score. It’s important to pay off large debts, especially since this is the second largest portion of your score. - Length of credit history
The length of your credit history makes up 15% of your credit score. Unlike payment history or outstanding debt, there’s not much you can do to increase the length of your credit history other than keeping accounts open, even if you don’t use them. - Types of Credit
The types of credit you have make up 10% of your score. These types include revolving credit, such as credit cards, and installment credit, such as loans. - New Credit Inquiries
New credit searches make up 10% of your score. Every time a lender inquires about your credit report, sometimes known as a “credit hit,” this may affect your overall score. However, certain inquiries made within the same timeframe may only count as one hit.
How to increase your credit score
Now that you know what a credit report is, what makes up your credit score, and who reports it to lenders and employers alike, it’s time to figure out how to increase your score!
- Make on-time payments
Since credit payment history makes up the biggest portion of your credit score, it’s crucial that you make payments on time. If you’re worried you might miss a payment, speak with your lender about possible options to avoid delinquency payments. - Pay high-interest debt
Make sure your outstanding debt isn’t more than 30% of your total credit, and pay off your high-interest debts first! - Keep accounts open
Try not to close lines of credit you’ve had open for a long time, even if you don’t use them anymore. The longer the account has been open, the more impact it has on your credit score.
Want more details about something we covered — or didn’t cover — in this article? Check out our credit counseling resources today!