What is a Credit Score?
Written By: Nick Nguyen | Read full profile
This post contains affiliate links which means if you click on a link and choose to make a purchase I may receive a commission at no additional cost to you. You are not obligated to do so, but it does help fund these blogs in hopes of bringing value to you! See our disclaimer for more information.
Table of Contents
If you opened your first credit card, congratulations! You’ve started your journey to building a Credit Score! Now, depending on who you talk to, Credit Scores are either really important or the plague.
Your credit score is essentially a number that will tell lenders how reliable you are at paying back debt. This number is super important if you’re applying for loans and can even help you save a buck or two on your car insurance.
There are many different terms you might hear out there when it comes to credit scores like a “FICO” score or a “VantageScore,” but the general idea is still the same! They look at these 5 big factors:
Payment history
How much of your credit limit you’re using
How long you’ve had credit history
The type of credit you have
Total number of hard inquiries
Ideally, you’ll want to aim for a credit score around 740-760 to qualify for all the perks and benefits that will save you money on loans, interest rates, and car insurance in the long-run. But we’ll chat about how and why in a future post. Just know that scores can range from 300 to 850 for both FICO and VantageScores.
This is how long you’ve been reliably making payments to your debt collectors. Think of it like a snapchat streak. You want it to be on-time over a long time.
This is typically calculated as a percentage of money you’re using from all your available credit limits. For example, if you’ve got a credit card with a limit of $1,000, and you’re using that card to buy $800 worth of stuff, your credit utilization is 80%! The higher this number is, the riskier you are, so the lower your score.
This is the aggregate age of all your credit accounts. It’ll count your oldest credit account, your newest credit account, and an average age of ALL your credit accounts. The longer your credit history, the higher your score.
*Be careful about closing inactive accounts. You could inadvertently decrease the average age of your accounts, decreasing your score! If you want to learn more about how this works, read about it in one of our other posts (coming soon).
This is a fancy way of saying what kind of credit lines are you holding? These can be from the traditional credit cards, from student loans, auto loans, and even from mortgage loans. You’ll want to diversify, have a good mix, and make sure you’re managing them well by paying them all off on time! This is how you’ll prove to creditors that you’re reliable! Of course, this is a relatively minor part of your credit score, so don’t sweat it! Having no debt or less debt is better than a higher credit score!
You might have heard people talking about “pulling credit scores.” There are two kinds of pulls people can make (hard vs. soft), which we’ll talk about later, but the main one you’ll want to worry about is the hard inquiry. Basically, the more inquiries you have, the worse you’re score will be. Again, this is a super small part of your score, and we’ll talk about tricks you can use to get rid of these and quickly beef up your score in a future post.
At the end of the day, your credit score is just a number that shows how reliable you are, but relies on you accruing and paying off debt. In an ideal world, everyone would only take-on as much debt as they can pay off. Especially with credit cards - pay off your entire statement each month - but a surprisingly large amount of people don’t really know this about their credit cards when they first get them, which explains why the percentage of people with credit scores below a 700 are so high, as reported by Experian in June 2020.
Feel free to check out our other posts on how to manage your credit, make money using credit cards, and so many other hacks we have in store for you to become fiscally responsible.
Feel free to check out our other posts on how to manage your credit, make money using credit cards, and so many other hacks we have in store for you to become fiscally responsible.
*Nguyening Lifestyles is not a registered financial service provider and does not give financial advice. All information in these posts are for entertainment purposes only. Nguyening Lifestyles is not liable for any actions or outcomes that transpired after your reading of the following post.
Recommended posts
