Credit Scores 101

Being a successful college student requires being skilled at juggling school, extracurriculars, and a social life. On top of all that, it’s easy for things like laundry and getting your car’s oil changed to fall by the wayside. 

It’s also understandable that you wouldn’t worry about your credit score in between cramming for finals. But having a good credit score can make your post-grad life a lot easier.

Read on to understand what a credit score is and how it works.

What is a credit score?

Your credit score is a number that reflects all the credit activity on your credit report. Think of the credit report as your financial report card and the credit score as your GPA. Credit scores range from 300 to 850. 

Credit scores fall into the following categories:

  • 300 to 579 – Bad or very poor  
  • 580 to 669 – Fair
  • 670 to 739 – Good
  • 740 to 799 – Very good
  • 800 to 850 – Excellent 

There is no universal credit score, but FICO and VantageScore are the two main companies that produce most of the credit scores you’ll see. FICO and VantageScore use similar scoring models with minimal differences. In general, these scores shouldn’t be more than a few points apart from each other.

If you’re looking at a free credit score from a site like Credit Karma or Credit Sesame, you’re seeing a VantageScore credit score. If your bank or credit card company includes a credit score on the statement, it’s also likely from VantageScore. When a lender or a credit card company pulls your credit score, they’re likely using a FICO credit score. 

One major difference is that FICO scores can vary depending on the type of lender viewing the score. For example, there are FICO auto loan credit scores, mortgage credit scores, and personal loan scores.

What is a credit score used for?

Lenders use credit scores to determine eligibility for their products. A credit card company may pull your credit score and use that information to decide how much of a credit limit to give you and what APR or interest rate to charge you.

Lenders aren’t the only ones who use a credit score to determine eligibility. Utility, car insurance, and cell phone companies also utilize the credit score. Those with higher credit scores pay less in car insurance premiums. A utility company may ask for a deposit before turning on power if your credit score is low or if you have no credit history.

Sometimes even potential employers will check a credit score when reviewing job applications. This mostly applies to those working law enforcement, finance, and the military. If you’re going to be handling a company’s payroll, they may run your credit to ensure you can responsibly handle your own.

What makes up a credit score?

The following factors make up the credit score model for both FICO and VantageScore:

On-time payments 

Payment history makes up 35% of the FICO credit score. It refers to if the user made payments on time. Missing even one payment can result in losing several points from a credit score.

Making every payment on time is the easiest – and most effective – way to build a good credit score. Those with little credit history should be especially careful about missing payments, since these instances will have a greater impact on their credit score.

Credit utilization

Credit utilization is the second-most important credit score factor and accounts for 30% of your score. The credit utilization ratio refers to how much credit is being used compared to the total credit limit. Credit utilization only refers to credit cards and lines of credit.

Your credit card statement won’t show your utilization percentage, but it’s easy to calculate on your own. Look at the current balance and divide it by the total credit limit. If the current balance is $425 and the credit limit is $1,000, for example, then the credit utilization is 42.5%.

The credit utilization percentage should ideally be below 10%, and a ratio above 30% will negatively impact your credit score. If you discover that your utilization consistently surpasses 30%, set a reminder to pay off part of the credit card balance halfway through the billing cycle. 

Length of credit history 

The length of credit history makes up 15% of your credit score and refers to the average age of all your credit accounts. In general, an older credit history means a higher credit score.

The only way to increase this factor is to keep old accounts active and avoid opening new accounts unless absolutely necessary.

Credit mix 

Credit mix refers to having both revolving and installment credit on your account. Credit cards are a type of revolving credit, while student loans, mortgages, and auto loans are examples of installment credit. Credit mix is responsible for 10% of your credit score.

New credit

New credit refers to how many recent hard inquiries you have on your credit report. Every time a lender checks your credit, it counts as a hard inquiry. Having several hard inquiries within a short period of time will ding your credit score. This counts for 10% of your score.

Where to check your credit score

You can check your credit score for free by creating an account on sites like Credit Karma or Credit Sesame. If you use the budgeting app Mint, you should already have access to your credit score. Other sites like Nerdwallet will also offer a free credit score.

Some banks and credit card providers like Discover, Capital One, and American Express also provide consumers with a free credit score. Most of them will update your credit score once a week or once a month, sending an email notification when the new score is ready.

You can buy an official FICO score for $29.95 a month, but it’s not worth paying for since the paid score will be relatively similar to the free score you’ll find on Credit Karma or Mint. 

If you want to see your official credit report, it’s available for free at AnnualCreditReport.com.

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