Credit Score 101

Credit Score 101

By: Barri Segal - Posted in:
Person educating themselves on the firs thing about credit scores 101

What Is a Credit Score?

A credit score is a three-digit number a credit reporting bureau assigns consumers, based on the information in their credit reports. The higher your credit score, the less risk you pose to lenders.

Your credit score predicts how risky of a borrower you are. You’ll find a number of models for credit scoring, but the most popular is the FICO credit score. In fact, according to the website myFICO.com, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”

Credit Score Componenets

So, what is a good credit score? FICO credit scores range from 300 to 850 — the higher your number, the lower a risk you appear to a lender. Each credit reporting bureau — TransUnion, Experian and Equifax — assigns each consumer a FICO score, and those scores can vary.

There are five major categories that comprise a FICO score — and the credit reporting agencies use your credit report data to determine your score. The five major categories — and how much weight each carries — are:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • Types of credit used: 10%
  • New credit: 10%

How to Check Your Credit Score

You might be wondering how to check your credit score. Although federal law states that consumers are entitled to one free credit report per year from each of the three major credit reporting agencies, they are not entitled to free credit scores. Remember that your credit report and your credit score are two different things — the agencies use the information from your report to calculate your score.

You can check your credit score, however, a number of ways. One easy, free way to check it is through your credit card company if it offers free FICO score access — if you don’t see that option on your credit card issuer’s website, call and ask about it. You can also get a free estimate of your credit score from myFICO.com by entering the following information:

  • The number of credit cards you have
  • How long ago you got your got your first credit card
  • How long ago you got your first loan
  • The number of loans or credit cards you’ve applied for in the last year
  • The last time you opened a new credit card or loan
  • How many of your cards or loans have a balance
  • The total balance on all your loans and credit cards
  • When you’ve missed a payment on a loan or credit card
  • The latest you’ve ever been on a loan or credit card payment
  • When you last missed a loan or credit card payment
  • How many of your loans and/or credit cards are currently past due
  • Your credit utilization rate
  • If you’ve had a bankruptcy, repossession or account in collections in the last 10 years

You can also get your credit score from the credit reporting bureaus. For example, Experian provides it for $1, Equifax charges $15.95 for your credit score and report, and for $19.95 per month, you can get access to your TransUnion credit score and report, plus free identity protection. Keep reading to learn how to improve your credit.

How to Improve Your Credit

Because your credit standing is so important to your overall financial health, make sure you know how credit repair works if your score is low. To fix your credit and improve your FICO score, use these seven tips:

1. Always pay your bills on time — set up payment reminders or schedule automatic debits so you never miss a payment.
2. Get current — and stay that way — on any missed payments.
3. Do whatever you can to reduce the amount of debt you have.
4. If you can’t pay your bills, seek help from a good credit counselor — and let your creditors know what’s going on.
5. Don’t close credit card accounts that you don’t use.
6. Do not open a bunch of new accounts at one time.
7. Check to make sure your credit reports are accurate.

The Bottom Line

It’s important to understand that fixing your credit won’t happen overnight. Now that you know how to improve your credit, remember that it’s a process — but it’s definitely worth the effort. A poor credit score can cost you in many life situations and be a serious source of stress.

Lots of people struggle to improve their credit scores, so know that you’re not alone. Keep in mind that there are many ways to fix and build your credit — and that when you do, you’ll enjoy all of rewards that come with having good credit.

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