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The Bare Necessities:

Your Credit Score

Part 1

Your Credit Score

If you already understand your credit score and how debt may impact it, you can skip ahead of this section for the sake of your attention span.  If you have no idea how the world of credit works, we can help with that.  Let’s get started!


What IS a Credit Score?

It’s a common misconception that you only have one credit score – there are actually countless organizations that track and calculate your credit history and what this says about you as a consumer.  But we won’t get into the nitty gritty of all these entities, because the be-all and end-all is your FICO score (which you’ve probably at least heard of.)  The FICO score is used by nearly all lenders, so you shouldn’t need to worry about any of the others.


FICO collects information from the credit bureaus to create one consolidated score that can be easily referenced by you, and by lenders who you are attempting to borrow from.  There are only three credit bureaus you need to worry about: Experian, Equifax, and TransUnion.  These credit bureaus are responsible for tracking your existing debt, overdue payments, and delinquencies that may indicate to lenders that you aren’t an ideal borrower.  Not all debt information is reported to the bureaus (and therefore never affects your credit score) which we’ll cover in more detail below.  


So what DOES affect your credit score?


Existing Debt

So this should be a given, but just in case: most existing debt will be reported to the credit bureaus.  While your total debt is obviously a major contributing factor to your credit score, it makes up less than one-third of the calculation.  Even if you are carrying a large amount of debt, there are several other factors that will determine where your credit score falls.


Outstanding bills like medical and utilities will likely only appear on your credit report if you’ve missed a payment – these typically will not count toward your total debt amount.


Credit Card Utilization

In addition to the total balance on your credit card(s), the percent of utilization will also be taken into consideration.  The percent of utilization is the amount owed on the account in comparison to the credit limit on the account.  For example (we’ll keep the math simple): If you have a credit card with a $1,000 limit, and the balance on the account is $300, this credit card would have a 30% utilization.  


The ideal credit card utilization is around 20% – this shows that you are actively using the account, yet you are not coming anywhere near the actual limit on the card.  If your balances are consistently higher than this 20% benchmark, even if you don’t exceed your credit limit, this high utilization will reflect negatively on your credit score.



Payments you make to your debt balances have the greatest power to help or hurt your credit score.  If you are late to make a payment, you generally have 30 days to catch up on your account before the lender will report the missed payment to the credit bureaus.  After a payment is 30 days late, it is common practice to report it, and the longer you go without paying the worse the impact will be on your credit score.


If you neglect to make payments for an extended period of time, especially on bills such as medical or utilities, your account will likely be turned over to a collections agency.  Collection agencies have the option to register this debt with the credit bureaus, which will take an even greater chunk from your credit score.


Bottom line: do everything in your power to pay the minimum amount due on your accounts.  Getting into this habit will save you a lot of financial heartache in the future.


Credit Inquiries

When someone checks your credit report for the purpose of a loan or credit card decision (such as a bank or credit union) this will appear on your report as a hard inquiry.  An inquiry is a request from these organizations to view your credit report, and FICO considers several of these requests within a short time period to be an indicator of a high-risk borrower.   


Hard inquiries for credit card applications are viewed more harshly than those from home, auto, or student loans.  Don’t be afraid to shop around for the best rates when considering these larger loans!       


Soft inquiries are performed when you’re pre-approved for a loan or when an employer performs a background check on you.  You can also always check your own credit through FICO or the credit bureaus.  These inquiries will not affect your credit score in any way, so don’t worry!


Credit Score Checklist:

  • Keep debt balances to a minimum and always aim to decrease your total debt amount.
  • Stay as far away from your credit limits as possible.  If you are carrying long-term balances on a couple cards, consider opening one or two new credit lines (but don’t use them) to lower your overall percent of utilization.
  • ALWAYS make payments on time – we really can’t stress this enough.
  • Avoid applying for several credit cards in a short period of time, especially if you are planning to shop and compare for a mortgage or other large loan in the near future.

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