Credit scores are one of those annoying parts of adulting that you need to know about. Landlords, mortgage lenders, insurance companies, and even your employer may check your credit score. You don't want any surprises. Let's take a look at how your credit score is determined.
Credit Score
Your credit score is made up of 5 different areas that have different levels of importance.
Payment History (35%)
Your payment history is based on your ability to pay on time. Be sure to always pay at least the minimum payment on your accounts. If you believe you will have trouble making the payment, contact your lender to see if they have any options to help you.
Credit Utilization (30%)
Credit utilization looks at how much you owe and what percentage of your revolving credit you are using. Try to keep credit cards below 30% of your limit. Using none of your credit is actually worse than using some of your credit.
Credit Age (15%)
What is the average age of your credit? If you have a lot of new accounts, this will negatively affect your account. Always keep your oldest credit card open and use it occasionally to keep it active so the company won't close the card.
Credit Mix (10%)
Your credit mix is determined by the different types of credit you have. Revolving accounts include credit cards, retail cards, or a home equity line of credit. Installment loans are mortgages, student loans, and auto loans. You do not need to have all of these loans, but having an installment loan and revolving account can be beneficial.
Credit Inquiries (10%)
A credit inquiry is when a company requests your report or credit score. There are soft pulls on your credit that do not show up as an inquiry and hard pulls on your credit that do show up as an inquiry. Hard pulls are generally used when you are requesting access to money. A soft pull is generally used by employers for checking your credit score. It is always good to double-check what type of pull will be used when your credit is checked. Credit inquiries only impact your credit score for a few years.
Your credit score may vary based on what type of scoring system is being used. There are Vantage Scores and FICO scores. Both scores have a range of 300 to 850. There are some minor differences, but they use the same information to assign a score.
Credit Bureaus
There are three credit bureaus: Experian, Equifax, and TransUnion. Your accounts may not be reported to all three credit bureaus, so there can be some variation in what you find on each report. You can check your reports once a year from each bureau at annualcreditreport.com. Beware of similar-sounding sites that take advantage of sounding similar to this website but charge you a recurring fee to access your report.
There are also many companies that allow you to access your credit scores and credit reports regularly. I personally use Credit Karma. Most of these companies offer loans and credit cards to fund their site. Better options may be available to you outside of the app, so do your due diligence and some research before signing up for any offers. However, the sites can allow you to monitor your credit for free and see ways to improve your credit.
Boosting Your Score
Experian has a program called Experian Boost that allows you to share your bank transactions with Experian. Records of on-time, regular payments can improve your score. This can include utilities, cell phone bills, streaming services, and rent (with qualifications). Note that this will only boost your score at one of the three credit bureaus.
For more tips on boosting your credit score, check out this guide on boosting your credit score by Department of Adulting.
Disputing Errors
If you see an error on your credit report, you can dispute the information with each credit bureau. Errors may be true errors, but they may also be a sign that your identity has been stolen.
Freezing Your Credit
You can prevent new accounts from being opened in your name by freezing your credit. You can do this with each of the credit bureaus. Be sure to save any relevant information that you need to unfreeze your credit, as companies will not be able to check your credit while the freeze is in place. You can temporarily unfreeze your credit for purchases that require financing.
TransUnion: https://www.transunion.com/credit-freeze
Final Thought
Remember, what is best for credit isn't always best for your financial well-being. It is important to have good credit so you have access to the best interest rates when borrowing money and access to financial products. However, you should always balance the best credit decision with what is best for you financially.
Opening lots of credit cards may improve your credit, but if it provides a temptation to overspend that you can't handle, then don't do it. Paying off debt usually benefits your credit in the long run, but if you don't start investing until you are in your 50s because you wanted to pay off your student loans, you will miss vital years of compounding growth through investing. Do your best to improve your credit, but don't lose sight of the big financial picture.