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5 Things Everyone Should Know About Credit Scores

David Warner

David Warner

Financial Advisor

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When it comes to money or credit score, there is a constant negative connotation that surrounds the topic. The truth is, not everyone likes to talk about their finances. While keeping personal finances, personal, is a great habit to build, the negative connotation that surrounds credit and money does not need to be there. Now, with proper knowledge and experience with credit, it can easily reduce the fear or anxiety that comes with it. In efforts to help increase the level of knowledge on the topic, in this article, we are going to discuss the 5 things that EVERYONE should know about credit scores.

 

1. The Factors of Credit Score

Do you know how your credit score is actually calculated? Many people have no idea how credit works or the factors that are utilized to compute those magic numbers. For beginners, an individual’s credit score is a reflection based on the following factors:

  • Credit Payment History (35%)
  • Credit Utilization (30%)
  • History of Credit (15%)
  • New Credit Lines (10%)
  • Credit Mix (10%)

By looking at the percentages, it’s clear that the two most important factors are Credit Payment History and Credit Utilization. What this means is that on-time payments contribute to over 35% of your total credit score number, and how much credit you’ve used or have not used can contribute to over 30% of your credit score. How is this knowledge useful? This is essentially the secret to how credit is calculated and used. Knowing this, you can begin to operate and utilize credit in a more knowledgeable way. Instead of maxing out a credit card to pay off other debt – these numbers demonstrate that such an action is counterproductive. The best thing you can do is eliminate all debt – not use debt to pay off debt.

 

2. Credit Bureaus

When most people think of credit scores, they believe FICO is the main institution that handles credit; however, this is not the case. This is extremely important to understand as, if you have any problems with your credit report or score, FICO will not be able to help – only one of the THREE qualified Credit Bureaus can help. Chances are, you have heard of these three before:

  • Equifax
  • TransUnion
  • Experian

These three agencies are responsible for developing your personalized credit report. Your credit, the number itself, will be based upon this information, and the factors listed above. Now, whenever you are applying for a credit card, car loan, or any form of hard-inquiries, you can ask the company where they are “pulling your credit” as they tend to pull for only one of these three bureaus. Do keep in mind, these three companies do look at credit differently and your credit score will vary depending upon the bureau used.

3. Checking Card Scores

When it comes to credit scores, there is a few misperceptions in the United States. Primarily, people believe checking credit scores hurts your score. Does this sound like you? If so, well, here’s the deal. Typically, credit card companies offer free “credit check” services each monthly, with disclaimers that your credit will not be affected. The truth is, your credit SCORE will not be affected; however, your credit report will show that you did indeed check your credit. Are you still with us? Now, your credit report will not be negatively impacted because a simply credit check is only a soft-inquiry, which does not devalue credit score. In our opinion, one of the smartest decisions and best ways to stay on-top of your credit is through always knowing your score and its progress.

 

4. Permanent Credit Score

If you believe your credit score is permanent, we may have some good news. Credit scores are NOT permanent. In fact, credit scores are temporary and can change by the day. In our opinion, rather than allowing credit scores to haunt or discourage you, look at your score as motivation. The best way to understand credit is to imagine it as a metaphorical roller coaster – it has it’s ups and downs, both at varying degrees and speeds. As a proud and knowledge credit holder, it should be your primary goal to maximize going up.  The best thing that you can do is start tracking your credit, reviewing your credit report, and developing an action plan to increase your credit score. The truth is, there are dozens of opportunities that await you; however, you just need to start!

 

5. Credit Scores ARE Important

We all know that credit scores are important. Whether you want to a car or a house, your credit will be utilized to determine whether you can afford it or not. However, what many people don’t realize is the true capacity of how much credit really matters. Today, businesses will look at your credit score to determine how much of a down payment you need, whether you can get insurance, how much premiums may be, or even for the smallest line of credits for the holiday season. Try to open a cell-phone line and guess what happens – credit check! Unless you have good credit, you can anticipate paying more money out of pocket. In other words, having bad credit will lead to costlier purchases and lifestyle.

 

Making Financially Sound Decisions

It has been said time and time again that knowledge is power. The truth is, with knowledge, you can make more wise and intelligent decisions, understanding what you know. When it comes to the credit industry, many financial mistakes and poor credit decisions could be avoided through simply being aware of how the industry functions. With that being said, in this article, we covered five of the most important aspects in the credit industry that revolve around credit score. With it, we hope that you begin incorporating this knowledge into your everyday life in efforts to not only increase your credit score – but live a more financially aware life. You will be more grateful than ever before if you begin taking action towards improving your credit score and making better financially sound decisions.