What You Need To Know About Your Credit (plus a helpful to-do list!):

by | Feb 6, 2023

Credit is a necessary part of your financial life and unfortunately, it is a little complicated for absolutely no reason. Having a great credit score can make your life so much easier and save you thousands of dollars. Your credit score will determine the loans you have access to, the interest rate charged on those loans, and it can even affect your employment and housing options. 


So what is a credit score?

A credit score is a 3-digit number that lenders use to determine how risky of a borrower you are and ranges from 300-850 on the commonly used FICO and VantageScores scoring systems. It helps lenders judge how likely someone is going to repay a loan they take out. The higher the number, the less risky you seem to be, which means better loan terms, better interest rates, and more options. Having an excellent or good credit score is a life hack. Seriously, it makes everything a lot easier and cheaper. 

For specific numbers according to NerdWallet, there are four categories you can fall under which include excellent, good, fair, and bad. An excellent FICO score ranges from 740-850, good is 670-739, fair is 580-669, and bad is anything 669 and under. 


How to have an awesome score & how they are calculated:

  1. Make your payments ON TIME. This makes up about 35% of your credit score. (Set up auto payments! Make sure you make AT LEAST the minimum payment with your auto-payment)
  2. Only use 30% of the credit available to you. This means if your credit line is $10k, you shouldn’t spend more than $3k (30% of $10k) to keep your credit utilization low. It’s the bank’s way of testing your self-control. This will account for 30% of your credit score. (According to Experian, those with top credit scores tend to use under 10% of their available credit)
  3. Stop applying for new credit whenever you see a good intro offer or reward points. Be deliberate when shopping for a new card or loan. When you apply for a new card or loan, the lender has to check your credit with a “hard inquiry” which will temporarily decrease your score. If you are shopping around for a good rate, try and do so within a 14-day period so that it will only count against your score as 1 hard inquiry. Hard inquiries only affect 10% of your credit score and will stay on your credit report for 2 years. 
  4. Having different types of credit like a credit card and a car loan can help your score. Having a mix of credit is worth about 10% of your score. It is not necessary to go into debt to have a good credit score, though. 
  5. The one you have the least control over is the length of credit history which makes up 15% of your score. This just takes time to build, obviously. You never want to close an old credit card, even if you don’t use that card anymore. Instead, just put the card on auto-pay and have something small like your Netflix charged to the card every month to keep the account active and open. Your length of credit history is calculated as an average so if you close on an old card, your average could go down substantially and affect your score. 


Credit Report

Your credit score is based on information in your credit report. Your credit report is a history of all the types of loans/debt you have, your payment history, and any outstanding balances or missed due dates you have had in recent years. 

Banks and lenders all report your debt information to the three main credit bureaus: Equifax, Transunion, & Experian. This means you have three credit reports and three different credit scores. Now most of these scores get calculated the same way but sometimes certain information doesn’t get reported to all three credit bureaus so this is where you can see some difference in your score. 

It is your responsibility to review these three reports REGULARLY and watch for things like:

  1. Accounts opened in your name that you did not open (identity theft)
  2. Incorrect information about payments or debts
  3. Outstanding debts in collections that you may have forgotten or didn’t know about

You can get access to your full credit report at annualcreditreport.com from each credit bureau once per year. A good strategy to do this would be to request access for 1 bureau every 4-5 months so that you are checking your report for free 3 times a year. If you have your credit frozen, congrats, you can do this task once a year and pull all three at the same time (recommend this option for ease & saving time!).


Credit Freezes

Ever heard of identity theft? This is when someone gets access to all of your personal information, gets some type of credit in your name, and leaves that loan there for you to handle. Fun for the thief, not fun for you. It can take 24-36 months to undo and it can be quite a time-consuming process (10/10 to be avoided).

Luckily, this kind of fraud is EASILY avoidable. All you need to do is put a freeze on your credit at each of the three bureaus. This means no one, not even you, can request to submit a hard inquiry (which is required for a new loan) for your credit score. If you ever need to apply for a new loan, it is a very simple process to unfreeze (thaw, unthaw, melt?) your credit temporarily. 


If you don’t want to read all that above, here are your action items:

  1. Request your free credit report at annualcreditreport.com from at least one of the three bureaus every 4 months to monitor your credit reports. You get one free copy from each credit bureau in a 12-month period. (Or get all three once a year ONLY IF your credit is frozen). Go through the reports and make sure everything is correct. See something wonky? File a dispute.
  2. Freeze your credit right NOW at all three credit bureaus to avoid identity theft:
    1. Experian 
    2. Transunion
    3. Equifax
  3. Pay your bills on time (set up auto-pay!), don’t use more than 30% of the credit line that is available to you, keep old credit cards open to maintain your credit history, and don’t apply for new credit cards every time you get offered a good deal.
  4. Check out Experian Boost (free) to get credit for bills you already pay like utilities, video streaming, and more to increase your FICO score instantly
  5. Brag to all of your friends that you have become the credit expert & watch your score continue to go up.