Money Movement

What is Credit/Credit Score?

Credit is how likely you are to repay borrowed money. This is often displayed as a number between 300 and 850. Think of it as your financial GPA. The higher the number, the better your credit is.

This score will determine if you're eligible for loans like credit cards, auto loans, and mortgages. It will also determine the interest rate you will pay on these loans. A higher score means a lower interest rate, which can save you thousands of dollars over the life of a loan.

There are two main types of credit scores, FICO and Vantage, and three credit bureaus that determine credit scores: Equifax, Experian, and TransUnion. Due to FICO scores being the go-to for 90% of lenders we'll be focusing on that. However, if you're interested in Vantage or would like to explore more this website may be of interest.

If you're interested in seeing how you stack up against the general population, you can always get a free credit report at www.annualcreditreport.com or any other trusted source like Experian, Equifax, or CreditKarma. Furthermore, these reports will show you what accounts have been opened under your name and could reveal unknown fraud.

What Makes Up Your Credit Score?

Your credit score is made up of five different factors. These factors are weighted differently, meaning some have a larger impact on your score than others. The five factors are:

Payment History (35%): This is the most important factor. It shows if you pay your bills on time.

Credit Utilization (30%): This is the amount of credit you are using compared to the amount of credit you have available across all accounts.

Length of Credit History (15%): This is how long you've had credit accounts open.

Credit Mix (10%): This is the different types of credit accounts you have, such as credit cards, mortgages, and auto loans.

New Credit (10%): This is the number of new credit accounts you've opened recently.

How To Raise Your Credit Score?

Credit scores can be confusing and even volatile at times. The number one thing is to never miss a payment. Payment history has the strongest impact on your score, and missed payments can stay on your credit report for up to 7 years.

It's important to remember that credit utilization is calculated monthly. A spike in usage can cause your score to drop, but the good news is that paying off your balance or lowering your utilization can quickly reverse that drop. Most experts recommend keeping your utilization under 30%.

Lenders look at your oldest, newest, and the average age of all accounts. Since time is the only thing that can improve this, it's best to keep your oldest accounts open.

Credit mix benefits from having multiple types of loans at the same time (mortgage, auto loan, credit cards).

Finally, new credit includes both recently opened accounts and hard inquiries. A hard inquiry typically happens when you apply for a new loan or credit card. While these can temporarily lower your score, they're a normal part of building credit. If you're curious about the difference between hard and soft inquiries, this website may be helpful.