Your credit score, often referred to as a FICO score (Fair Isaac Corporation), is one of the most important aspects in determining your interest rates for your mortgage, car loan, apartment approval, and other items. That means that the lower your credit score, the more money you may pay overall in your life and less opportunities that you have.
Take a look at this Camry example with actual numbers to really bring it home.
Your credit score is a three-digit number that ranges from 300-850.
· 300-549 (BAD)
· 550-619 (POOR)
· 620-679 (FAIR)
· 680-739 (GOOD)
· 740-850 (EXCELLENT)
Credit scores can effect your interest rates on some loans according to www.credit.org.
It seems like your credit score is this nebulous cloud that no one can figure out nor understand how it’s calculated. It is the most important measure of your credit “worthiness”. To help make more sense of how it all works, let’s explore five factors that go into your score from Wells Fargo.
Payment History
The history of your payments attribute to the lion’s share of your score—35%. This means if you made your payments on time, if you missed any payments, how many days past due you have been, and how recently this all occurred. Every time you miss a payment, it negatively effects your score.
Amount Owed
How much you owe makes up 30% of your credit score. This is how much you currently owe. It also factors in the amount owed based on the total amount that you could borrow (total available credit). The number and types of accounts you have are considered as well. That means high balances and maxed out cards (even if you only have a low limit) will lower your credit score, but smaller balances can raise it. That is, if you pay on time. If you have new loans with little history, that may drop your score temporarily. Any loans that are close to being paid off can increase your score because you’re showing a positive and successful payment history.
Length of Credit History
How long your history is counts as 15% of your credit score. The longer your history of making timely payments, the higher your score will be. I know that you might think that not having a lot of credit will make things better for you, but it will actually hurt your score if you have no credit history for lenders to review.
Kinds of Accounts
Having a variety of accounts, including revolving, installment, mortgage, credit cards can help improve your score if you have good payment history. This makes up 10% of your credit score.
Recent Activity
The final and last 10% of your score rounds out with recent credit history. If you’ve applied for and opened a lot of accounts recently, it gives the lender the impression of potential financial issues and could lower your score. In contrast, if you’ve had the same loans and cards for a long period of time (with on time payments), your score will go up, even after payment troubles.
Credit Bureaus
In the United Stare, there are three credit bureaus used to review and accumulate your credit information. Those companies are Equifax, TransUnion, and Experian. They dominate the credit industry and are in charge of collecting, analyzing, and disbursing information about consumers.
You are allowed to see your credit report for FREE from all three sources every twelve months. Go to www.annualcreditreport.com to get this information. Before beginning the purchasing process for many items (home/car), it is imperative that you are aware of any potential problems on the reports so that you are prepared when others are reviewing the report and have questions.
If you have a sketchy payment past, you have hope. It’s much easier to increase a really low score than raise an already high one. It’s possible to raise your low score by as many as 100 points in less than five months by being aware of what goes into your score with the most important item being on time payments.
Young Adults
How can you help your young adult with building their credit score? It’s never too early to get them started out on the right foot. Even though they are young and even still considered “your baby,” having good credit can make their life easier. Some important things that depend on their credit score are:
· Applying for credit. With applying for loans or credit cards, having good credit will make it much easier.
· Renting an apartment. The landlord will likely check a young adult’s credit score. If they have a poor history, they may have to put down a larger down payment for rent, utilities, or internet.
· Getting their own phone plan.
· Getting insurance. Depending on the state, credit history may impact what rates they’ll get. It also may even lower their monthly payments. Even if they’re currently still on your insurance, this will not always be the case.
· Getting a job. Some employers may check a credit score before even offering a job.
· Refinancing any loans (student, vehicle). They may be able to refinance at a lower rate with a good credit score.
Now that you see how important it is for them to have and maintain a good credit score, let’s discuss how they can get there.
Authorized User
If you, as the parent, have good credit, this may be a good start for your young adult. This is where they get their own credit card, but it’s on your account. Make sure that you call your credit card though because many do not report authorized users to the credit bureau. With our credit cards, this is the case. **Important to note that your minor child can also be an authorized user, which can be helpful for a parent. It can teach them responsibility and can be helpful for the future. It’s my belief that you should be teaching your children (especially teens) about finance and dealing with credit cards and other things long before they’re 18 and can do it on their own. The availability of credit is too dangerous in an uninformed novice’s hands.
Student Credit Card
It’s much easier for your 18-year-old to be approved for a student credit card rather than a standard card. I think that’s good and bad. Out of control teens can quickly rack up a bunch of debt if they are not advised and taught how to use them. Make sure they are aware of what can happen if they overspend and charge too much. My family loves the Discover It credit card for students. They get cash back and it even shows their credit score right online. Go to www.discover.com to find out more.
Student Loans
Student Loans can be a big source of establishing credit for the younger generation. Even if you are deferring the payments, it still can help build a credit persona. Always the most important part is paying on time!
Utilities
If your children are living on their own and responsible for their own utilities and/or cell phone, you can add these accounts to your credit report via Experian Boost. https://www.experian.com/consumer-products/score-boost.html
In talking about finance, your credit scores determine and are connected to so many things. Interest rates, down payments, and whether you’re approved at all. That’s why it’s so important to pay attention to it and take the steps to get it into the EXCELLENT category (740-850). You can do it and it’s so important for your financial health if you do!
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