As a follow-up to last month’s Money Monday post about credit card myths, we will focus on the topic of credit scores. We last discussed this back in 2013 so it is time for a re-visit! Last month, we mentioned that utilization, or your statement balance as a percentage of your total available credit, is one element of your credit score. What are the other elements and why are they important?
Your credit score (or FICO score) is the most important factor considered by lenders when you apply for ANY type of loan/financing. Your credit score is one way in which a lender assesses whether you are a “good” or “bad” borrower of money. Typically, the higher your credit score is, the better rates and terms you will receive when borrowing money. Besides utilization, the other key factors considered in determining your credit score are:
- Payment history
- Length of credit history
- New credit opened
- Types of credit you have
Your credit score may also be temporarily lowered as a result of lenders and others making inquiries into your credit. To build credit, it is important not only to have a credit history (e.g. credit cards, student loans, home loans, car loans), but to make timely and FULL payments on all of your credit and loan accounts. Remember, a lengthy credit history will bolster your credit score. However, also remember utilization; you don’t want to max out your credit cards.
Many credit card companies, such as Discover, now give their consumers their FICO score each month. According to FICO, 83% of the population experiences changes to their FICO score by up to 20 points month to month. A “good” FICO score is generally one that hovers in the 700 range (on a scale of 300-850). A score of 740-799 generally indicates a very dependable borrower, while a score of 800+ indicates an exceptional borrower. So you might want to look at these tips on how to get a good credit score, or a better one than you already do have!
For more information on what is used to determine your personal FICO score, you can access your credit report three times a year, or once per year from each of three credit agencies: Experian, Transunion and Equifax. Go to this website to find out more!
~Megan Mathers, JD, Mathers Law