A Beginners Guide to a Credit Score

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If you’re like most Americans, balancing your checkbook is a monthly chore. Keeping track of all your expenses and categorizing each with the receipt is tedious, but a huge step toward financial freedom and stability. But another important factor that usually goes overlooked is your credit score.

When you first research it, understanding a credit score can seem complex, but as long as you pay your bills on time, there’s nothing to worry about. The financial system favors consumers who are consistently responsible when it comes to paying bills each month.

The Basics of a Credit Score

I always thought that even a penny of debt was awful and would count against me, but I was pleased to learn that as with all upstanding things in life, a credit score is about balance.

A credit score, or FICO score, is the culmination of a person’s credit-to-debt ratio. This indicates the credit-worthiness of a person, or how reliable you are to paying bills on time. FICO scores are used by banks, insurance companies, landlords, employers, and other parties to assess whether or not you are deemed “creditworthy”.

It’s also used to determine if a person meets the minimum qualifications. For example, if you’re applying for a home mortgage, there are loan programs that offer better terms. In order to qualify for the better programs, you will have to meet a lenders minimum credit score requirement. Your score also determines loan interest rates and credit limits.

FYI: Credit scores do not take into account credit or savings accounts you have. It’s purely based on your credit-to-debt ratio.

What’s In A Credit Score?

One of the requirements for a credit score is that you have an account open for six or more months. For those who are juniors or seniors in college, it’s smart to get a head start on your credit by applying for a starter credit card as early as you can.

Missed or late payments can destroy your credit score, so the best strategy is to establish a good track record of making your payments, or at least your minimum required payment, on time each month.

Below is a list of the five major factors that determine your credit score.

  1. Payment history
  2. Credit-to-debt ratio
  3. Credit history length
  4. New credit opened or requested
  5. History of credit (i.e. student loan debt)

One of the things to remember is that there’s no “quick fix” for repairing or improving your credit score — it takes time. Be careful of any service that claims to “improve your credit fast.” You can’t remove what’s already listed in your credit history unless it is incorrect information, which you’re legally able to dispute, though it is a lengthy process.

Where Do I Get A Credit Score?

A FICO credit score ranges from, 300 and 850 (with 850 being the best). The higher score indicates a low risk, which is what lenders like to see.

If you have an online banking account via a traditional bank or credit union, you can usually use their online portal to request a copy of your score.

You can also go online to request a copy of your credit score directly from the three major credit bureaus, Experian, TransUnion, and Equifax. Each credit bureau has their own method for calculating your score, but they all use FICO as the accepted method.

Are Credit Scores Really Free?

Under the Fair Credit Reporting Act, you’re legally entitled to one free credit report every twelve months (annually) from each of the three major bureaus. You can visit the websites below to directly request your credit report from all three of the credit bureaus.

  1. Equifax
  2. Experian
  3. Transunion

Also if you want to keep track throughout the year, online tools such as the CreditKarma.com credit score simulator is useful. It makes it super easy to estimate your score throughout the year based on your activity.

What’s On A Credit Report?

  1. Personal Info: your legal name, address, social security number, date of birth, and employment status.
  2. Accounts: this includes type of account, date it was opened, credit or loan limit, account balance, and payment history. Remember that a credit score does not include activity on your personal checking and savings accounts.
  3. Number of Inquiries: this is a list of everyone who has accessed your credit report within the last two years. This part includes both ”voluntary” and “involuntary” inquiries. Voluntary inquiries are those you personally authorize (i.e. credit card application) vs. involuntary inquiries (i.e. pre-approved credit card offers).

Negative Inquiries: may include missed or late payments, overdue personal debt (from a collection agency), and public record info such as bankruptcies, suits, tax liens, or home foreclosure.

If you leave this post with anything, please remember that credit cards are only beneficial to you if you pay them off.

Someone without any credit history is likely to be categorized as a higher risk. My advice would be to open a student, or pre-paid credit card early, and make sure to establish and maintain good credit.

Today's article is a guest post brought to us by MortgageWiki.org.