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.