Understanding Credit Scores
This playbook provides an informative guide on the components of a credit score. It details the calculation process and identifies the factors that influence credit scores.
Step 1: Score Basics
Familiarize yourself with the concept of a credit score, which is a numerical representation of your creditworthiness. It is primarily used by lenders to evaluate the risk of lending money to consumers.
Step 2: Scoring Models
Research the various credit scoring models such as FICO and VantageScore. Understand that different models may use different scales and that your score may vary across these.
Step 3: Major Factors
Learn about the five major factors that influence your credit score: payment history, amounts owed, length of credit history, new credit, and types of credit used.
Step 4: Payment History
Recognize the significance of payment history, which is the record of how timely you are with paying back debt. It is the most influential factor affecting your credit score.
Step 5: Credit Utilization
Understand credit utilization, which refers to the ratio of your credit card balances to your credit limits. It's advisable to keep this ratio under 30%.
Step 6: Credit History
Consider the length of your credit history, as longer credit histories can contribute to higher scores. This includes the age of your oldest account and the average age of all your accounts.
Step 7: New Credit
Be aware that opening several new credit accounts in a short period can lower your credit score. This is due to the hard inquiries that lenders perform which can have a small and temporary impact.
Step 8: Credit Mix
Know the variety of credit types (credit cards, mortgage, auto loans, etc.) in your profile. A mix of different types of credit can positively affect your score.
General Notes
Check Regularly
Regularly check your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—to ensure accuracy and to identify any discrepancies that could affect your score.
Improvement Takes Time
Improving your credit score is a process that takes time. Consistent responsible credit behavior, like paying bills on time and reducing debt, will gradually improve your score.
Score Variation
Remember that your credit score may vary slightly between the three main credit bureaus and across different scoring models due to the information available and the specific algorithms used.