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How to Gauge Your Credit Score and Why it Matters

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When you look at your credit score what do you see? If the answer is a mystical number that was randomly selected by some credit bureau then you are not alone. Over 33 percent of the population according to a Transunion survey have never checked their credit score. That equates to roughly 108,239,999 other people in the same boat as you are.

In reality, your credit score is by far one of the most important numbers in your life, ranking higher than the amount of money in your bank account. Sure you may know the phrase “money talks ” but something else “walks”. Well depending on where you are on the spectrum, credit OPENS the doors. Technically there are over 50 different types of credit scores that exist today including, FICO 28, Vantage Score 3.0, and many more. But I’ll spare you the full details and just cover 3 of them in this post.

Credit Scoring Categories

There are several credit scoring categories, however, only five of them are really focused on when it comes to consumer credit reports. Algorithms determine a score that is reflective of the category of credit score that you have. The range also lets you know which areas you need to work on and where you are compared to everyone else.

“Excellent” credit is for people who have typically never missed a bill payment or credit card payment, have a healthy credit mix, and a substantial amount of credit lines or credit limits available to them. If you have excellent credit then it’s extremely likely that you will be guaranteed the lowest interest rates possible on loans, mortgages, and other credit products (unless you have outside factors which disqualify you).

“Good” credit is when you have great financial habits, including paying all of your obligations on time. However, you may have had one too many recent credit inquiries on your report or be a couple of months out from paying off an installment loan. By keeping on the same financial pace, your credit score can jump to the next category, sometimes as quickly as 30 days.

“Fair ” Credit is more of a middle-of-the-range area which many people fall into. This means that although there may have been some blemishes in the past such as loan defaults, credit card overspending, or a situation where you had an emergency that caused a delayed payment of sorts. You will know when your credit is fair because all of a sudden you will start to receive a ton of credit offers in the mail pretty much overnight. And while it may not be the goal for some it is absolutely an acceptable category.

“Poor” credit is also known as “subprime” is one of the lowest groups a person can be in. It’s typically reserved for those who make decisions that can lead to unfavorable financial consequences. If you have poor credit you may have things such as court-ordered judgments that have gone unpaid, a couple of credit cards with maxed-out limits, and possibly a repossession from an auto loan that wasn’t able to be repaid.

“Very Poor” which is often referred to as “deep subprime” is essentially the bottom rung of the credit ladder. Usually, people with either little or no experience with credit fall into the very poor group. This is indicative of several financial missteps including but not limited to bankruptcies, severe debt delinquencies of sixty days or longer, foreclosures, etcetera.

Algorithms

Credit scoring algorithms are comprised of many different factors that take into account a person’s full financial outlook to determine which level best relays a person’s credit risk. The main factors that are used include payment history, credit mix, debt amount, length of history, and new accounts. This information is then put into a profile which is best shown in the form of a credit score and credit category.

When deciphering your own personal score you may notice that your newer accounts and credit mix make up 10 percent of your score individually, while other facts carry a larger weight such as your payment history and debt amounts which account for 35 percent and 30 percent respectively. Your length of history makes up roughly 15 percent of the total profile. Each of these percentages can increase or lower your score as new information is gained over time. Percentages can also fluctuate based on which model is being used.

The Three Prominent Credit Bureaus

Experian According to Experian, their credit scoring model uses a range of 300 to 850 with the former being the lowest possible score which equals very poor credit and the latter being the best score reserved for excellent credit. Their FICO score is used by most lenders to assess whether or not you are a suitable candidate to extend services.

TransunionTransUnion which is also one of the three predominant credit bureaus uses the Vantage Score 3.0 version to construct a person’s credit score. The range begins at 300 and goes to 850 as well but the percentages that are used have slightly different calculations. For example, your payment history is valued at 40 percent while your amount of available credit accounts for only three percent.

Equifax One key difference is the scoring module for Equifax for which the range is broader in that it’s composed of scoring from 280 to 850. The scoring system still adheres to the premise that the lower your score the higher categorical risk you pose to potential lenders. The factors are relatively the same as the other two but inquiries or the number of times that you’ve sought out credit within a fixed time frame such as the last 24 months is an additional factor taken into consideration.

Credit may not seem like such an important factor in your day-to-day decisions but when it comes to making key decisions in life understanding it’s one of the most invaluable tools a person can have at their disposal. So the next time you’re considering your future and basic things like renting an apartment, getting car insurance, purchasing a home, buying your dream car, or funding for your college degree, keep in mind that your credit score can swing the door wide open or slam it shut on your opportunities.

Regardless of where your credit score falls, there is always room for improvement. Developing good financial habits like budgeting, saving, monitoring credit usage and debt to credit ratio can turn even the most unfavorable score into one of the best scores attainable.

Sites like Credit Karma, Credit Sesame as well as paid credit bureau monitoring can help you discover your own credit score with daily, weekly or monthly updates. Also, free credit reports are provided annually and you can get your three-bureau report. If you find yourself struggling please reach out to a financial educator or credit specialist to get you on the right track.

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