All About Credit Scores.
As we spend this month exploring all the aspects of debt, it makes sense to include a discussion about credit scores. Everyone knows a credit score is important, but few realize all the factors that go into it. And did you know that your credit score factors when you get an insurance quote, apply for a job, rent a space or start utility services? Let’s dive right in:
First, let’s define what a credit score is. We could get really fancy pants here & go into a lot of details, but basically a credit score is a tool used to predict how you will handle debt. There are two models, but FICO is used about 90% of the time, so we will focus on that particular model. Your score will fall between 300-850 & assigned a rating “poor” to “excellent”.
Let’s not get caught up on labels, shall we? Keep in mind that this is from the perspective of a potential creditor & not a commentary on you as a whole person.
Your score may vary depending on which of the three major agencies you are checking. Your score won’t vary a TON, but slight differences are to be expected.
They are very secret squirrel about the exact formula they use, but the major factors are:
Payment history - Are your payments on time or late? Do you have any liens or bankruptcies? Remember that paying on time, even if it’s just the minimum is weighted most heavily in the calculation
How much you owe - This looks at how deeply in debt you are.Try not to exceed 30% utilization of your limit.
Length of credit history - The longer you have responsibly used credit, the better. This shows a longer pattern of repayment as agreed.
Type of credit - We will talk about types of credit in a later post, but this looks at the mix of credit you have used: cards, mortgages, installment loans, secured, unsecured.
New credit inquiries - This is an indication that you have just (or are about to) take on new debt. There are soft inquiries and hard inquiries. Soft hits are you checking your own report, or “preapproval” offers, or checks from potential employers. These do not affect your score.
Check the link at linktr.ee/missoulabookkeeper to request a copy of your credit report, and check out the next post for tips on how to raise your score!
