What You Need to Know About Credit Scores

If you’ve been following me for a while, you know I talk about credit a lot. As a financial therapist, some of my time with clients is spent simply ensuring that they understand all the financial terms that get thrown around. An area ripe for confusion is credit scores. I realize I haven’t broken down what goes into a credit score. In this video, I answer the questions: What is a credit score? Why is it important? And, how can I find it?

  • WHAT Your credit score is a three-digit number that ranges from 300 to 850, that tells lenders whether you are a safe person to lend money to. You should really be aiming for a credit score for 700 or higher. Even though 850 is considered perfect, once you pass the 700-740 mark, it’s basically all considered excellent. You really don’t want that score to dip below 600 because your odds of getting approved for things is low and the odds that you’ll have a higher interest rate increases.

It doesn’t matter if you don’t want a credit card. A credit score helps with many aspects of your financial life and may come into play in other ways.

Your credit score impacts things like your car insurance rates, loans, whether or not you can be approved for a mortgage or apartment, and some employers now pull credit scores, especially if you are doing anything in the financial world. Even if you aren’t a “credit card person,” you still need to have a good credit score.

  • How? How does your credit score get calculated? There are so many myths out there about how your credit score gets calculates so I’m going to break it down for you as there are a few factors that go into it.

The two biggest are:

  • On-time payments--Accounts for 35% of your score. On-time payments means you are making your payments on-time, pretty straightforward.

  • Credit utilization or credit ratio--Accounts for 30% of your credit score. This one is a bit trickier to break down. You want to be utilizing 30% or less of the credit you have available to you. Let’s say you have a credit card with a limit of $1,000, you want to not have more than $300 charged onto that card. If you are charging $600, $900 out of that $1,000 limit, your credit score will go down because you are using a higher percentage of the credit available to you. This is why people in the travel hacking game often say their credit score goes up. Because they continue to spend little compared to the amount of credit extended to them. So they go from having a $1,000 credit limit up to $50 or $70,000 limit but they are still charging very little on it which makes their credit utilization lower, and thus, better.

  • Length of credit--15% of your score. How long you’ve had your credit line open

  • New credit--10% of your score

  • Types of credit--10% of your score. This is a variety of types of “loans” or credit. For example, a credit card is considered different than a car loan or a mortgage.

So really, the bulk of it is to pay your stuff on time and to not over-extend yourself as those two factors make up such a large part of your credit score.

  • Finding your score. Finally, how do you find that credit score? Most credit card companies or banks will offer your credit score for free. If not, you can try sites like credit karma or credit sesame (not sponsored). They pull up your credit report and take a look at the different factors that are impacting your score.

That's it! I hope I've answered your questions about what a credit score is, what factors impact it, and how you can find your credit score.

How to Get Started Travel Hacking

GET STARTED TRAVEL HACKING Interested in learning how to maximize your good credit score for free and discounted travel? In this video, I walk you through the art of travel hacking step-by-step. This travel hacking method leverages the lucrative sign-up bonuses from credit cards, earning you points and miles to be redeemed for free travel.

  1. Check, and know, your credit score You can check sites like creditkarma.com creditsesame.com to get your free three-digit score. The best offers are for those with great credit of 700+

  2. Know your monthly spending on things you’d already be spending your money on such as gas, groceries, and monthly bills.

  3. Find the right card that has a welcome bonus that is awarded once you can meet the minimum spend. Several options are listed below to help get you started

  4. Stay organized and make sure that you are meeting the minimum spend requirements within the timeframe required to earn bonus points

  5. Pay it off by paying the entire balance at the end of each billing cycle.

  6. Redeem! Use your points to offset the cost of travel.

If you are interested in getting started, here are some cards with low-to-no annual fees that you can check out. These may be affiliate links, meaning I may be paid or earn points at no additional cost to you if you click through and are approved.

Chase Freedom Unlimited Earn $150 bonus with Chase Freedom Unlimited if approved. https://www.referyourchasecard.com/18/CFUJQ7E6P3

Chase World of Hyatt Earn up to 50,000 bonus points with the World of Hyatt Credit Card if approved. https://www.referyourchasecard.com/205/2VVH79UI0Z

American Express Preferred Everyday Earn 20,000 Membership Rewards Points if approved and you meet the minimum spend requirement! http://refer.amex.us/RAYMOPJn6x?xl=cp01

American Express Blue Cash Everyday Earn a $200 statement credit if approved and you meet minimum spend requirement! http://refer.amex.us/LINDSBD9Nf?xl=cp01

American Express Platinum Delta Skymiles Earn 75,000 Delta Skymiles if you are approved with this link and you meet minimum spend requirements! http://refer.amex.us/RAYMOPMYm1?xl=cp01

American Express Simply Cash Business Apply for an American Express Card with this link. Earn a $250 statement credit if approved and you meet minimum spend requirements! http://refer.amex.us/LINDSBrHUA?xl=cp01