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Understanding your credit score

You’ve probably heard the term "credit score." It can sound scary - this mysterious number floating around when you apply for loans and credit cards. But don’t worry, with a little information, it's much less intimidating. Let’s dive into the basics.

What is a credit score?

A credit score shows how you’ve handled loans in the past and how you’re managing them now. It’s a number lenders will analyze when you apply for a loan for a house or car, or just a new credit card.

Credit scores are calculated by the three national credit bureaus – Equifax, TransUnion and Experian. The score is rated on a scale from 300-850. Anything below 579 is considered to be poor, while a score above 670 is good, and anything higher than 800 is exceptional, according to Experian.

The two most common brands of credit scores are FICO® and VantageScore®. FICO® scores are calculated using five categories from your credit report: new credit, credit mix, length of credit history, payment history, and amounts owed.

Why does it matter?

Generally speaking, the higher the credit score, the better the chance of being approved for a loan. A higher credit score could mean better terms on future loans, like lower rates or fees, so you could potentially pay less interest.

A high credit score goes beyond borrowing, too. In many states, employers are allowed to check your credit score when considering you for a job. Companies whose services you utilize, like cell service providers, insurers and utility companies, could even charge you higher fees and rates if you have a low credit score. So do your future self a favor and keep that credit score high!

What makes up my credit score?

Here’s a look at some of the things credit bureaus will examine when calculating your credit score:

  • If you’ve paid your bills on time in the past
  • How much debt you have and what kind
  • How much you owe on things like a credit card, compared to its limit
  • How long you’ve had that credit card and other loans
  • How long you’ve been a good borrower
  • The number of times a lender has checked your score, like when you apply for a loan or credit card

How can I increase my score?

Follow these simple tips and you’ll see your credit score rise.

  • Pay on time - Payment history makes up almost half of your credit score. Late payments and collection notices can damage your score.
  • Keep low balances - As a general rule, try not to use more than 30% of the credit that’s available to you.
  • Check for mistakes - Read through your credit score every month, checking for mistakes on the report that should be corrected.
  • Don’t collect cards - Opening new cards just to increase the credit available to you can harm your score.
  • Don’t ditch the card - Closing a card you don’t use often will reduce your credit and potentially hurt your score, too.
  • Mix it up - Make sure you have a variety of credit, not just credit cards. A home, car, or personal loan looks good on your report, too.

To keep these tips in mind, review our credit score graphic anytime. For more information on credit scores and learning to be a smart borrower, give our Borrowing Like a Boss ebook a read.

You can also check on your credit score with these credit bureaus:

Equifax
P.O. Box 740256
Atlanta, Georgia 30374
1-800-525-6285
www.equifax.com
For disputes:
www.investigate.equifax.com

Experian
P.O. Box 9532
Allen, Texas 75013
1-888-EXPERIAN(397-3742)
www.experian.com

TransUnion
P.O. Box 6790
Fullerton, CA 92834
1-800-680-7289
www.transunion.com

This is not a bureau, but a service you can use to request your report - at no charge - on an annual basis:

Annual Credit Report Request Service
PO Box 105281
Atlanta GA 30348-5281
1-877-322-8228
www.annualcreditreport.com

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