Talk of “credit scores” is everywhere— even on TikTok! You need credit to do most things that would classify as adulting like buying a home, buying a car, buying a new flatscreen for your apartment, and even buying the latest phone (because they’re so expensive these days!).
Everyone is talking about credit scores but no one is explaining what they are, how to know if your score is good or bad, how they affect your ability to buy the stuff you want, how to responsibly manage your credit and where to even find out what your credit score is.
Don’t freak out. You got this! We’ve done all the hard work for you so all you have to do is sit back, read, and maybe take some notes.
What is a Credit Score?
A credit score is a three digit number folks with the money use to estimate if you’ll pay them their money back on time. Companies like FICO and VantageScore use credit scoring models aka math to calculate your credit score from information in your credit report.
Your credit report is made up of your personal history (name, address, phone numbers, past credit accounts, status of any loans, if you’ve ever filed for bankruptcy, etc.).
Your credit score itself is affected by:
- How you pay your bills
- Your outstanding debt (looking at you student loans)
- Your credit mix (more on this later)
- How long you’ve had credit
- Your credit utilization (how much of your credit allowance are you using)
- If you apply for new credit/loans
- If you’ve filed for bankruptcy, had bills sent to collections, or been in foreclosure
We’d be remiss if we didn’t tell you that you have multiple credit reports and scores because each lender uses different math to figure out your credit score.
Credit Score Scale
Now that we know what a credit score is, let’s talk about the credit score scale. Like all judgements we make in life, your credit score can be very good, okay, bad, or ugly.
Remember that credit bureaus (those pesky people who stalk your financial data and use it to calculate your credit score) use different math to figure out their credit score scale and what magic number you need to borrow money from them. But we know you want to know specifics.
- What is a bad credit score? FICO says anything from 300-579.
- How about an average credit score? Anything from 580-669.
- What is a good credit score? According to FICO, a good credit score ranges from 670-739.
- Very good credit score? Anything from 740 - 799.
- What is an excellent credit score? FICO says anything from 780 - 850.
Why Does Any of This Matter?
Life would be much easier without credit scores, but unfortunately, they exist (at least for those of us in the USA). Your credit score might seem unimportant as it is intangible, but it actually has a big impact on your ability to do the whole adulting thing effectively.
It impacts what interest rate you get when you want to apply for a mortgage or buy a new car. If your credit score sucks then you’re going to get a sucky interest rate too and end up paying more for your car than someone with a better credit score than you.
We tend to need credit for a lot of things, unless you’re made of money.
There are three different types of credit: revolving credit, installment credit, and open credit. Let’s get into it.
Think of your credit cards or a home equity line of credit when we say revolving credit. This is money that you can borrow from freely but that has a credit limit that restricts how much can be used at any particular time. You usually pay this back monthly and have to pay interest if you don’t pay off your bill every month.
Those student loans, your mortgage, or your car payment are forms of installment credit. Installment credit is a loan for a set, mutually agreed upon amount of money with a fixed, regular repayment schedule.
If you’ve ever heard anyone mention a charge card, then you know what open credit is. With open credit or a charge card, you absolutely have to pay your full bill back every month, whereas with a credit card you can only pay the minimum balance due back every month even though you shouldn’t do that. A charge card also typically won’t have a spending limit and credit cards definitely do.
Do you see how many adulting things were covered in that list though?
Your car. Your home whether you own it or are renting (landlords run credit checks too). Your education. Your ability to book a vacation at the drop of a hat.
All things we want and need. So, let’s get into the good stuff: how to work on building up your credit score.
How to Get a Good Credit Score
It’s kind of insane that three little numbers have such a big impact on whether or not you’re able to get the things you want and how much you’ll pay for them, but they do! Here’s how to move your credit score from bad to excellent or from good to better and one day maybe best.
Have a Positive Payment history
You’ve got to pay your bills on time as best you can. It’s really important and as simple as that.
Paying your bills by or before their due date is going to prove to lenders that you’re responsible and that they can trust you to get them their money back (even though they kind of stand to benefit if you don’t pay it back because of interest). We’re not here to make the rich any richer! Pay your bills on time so that you avoid paying interest and can get to the bag aka a higher credit score faster.
Have a Long Credit History
Keep credit accounts open even if you’re not using them. This mostly applies to credit cards. When you pay off a credit card (yay!) don’t close the account. You want to keep it open so that your credit history becomes decades long instead of full of starts and stops every time you open and close a credit card account.
Live Within Your Means
Don’t borrow more than you can pay back and don’t use more than 30% of your credit limit. That’s a red flag to lenders that you’ve bitten off more than you can chew. Why would they give you more credit when you aren’t using what you have responsibly?
Add a Little Bit of Spice
We explained the different types of credit earlier. Lenders want to see that you can handle different types of loans and aren’t just putting all of your eggs in one basket. So, have a car loan and a credit card or a mortgage and a charge card. The point is that you want to have a balance of accounts so that you prove yourself across the three credit types that exist.
We’re the first debit card that helps you build credit when you shop, pay bills, and book that trip. We loan you money for your purchases against your bank balance and pay ourselves back the next day.
You can’t go over your credit limit or overdraw your account because we’ll only cover you for money that you already have.
At the end of the month, we take those purchases that we spotted you for and report them to those pesky credit bureaus as proof that you’re responsible and can handle everything that comes with borrowing credit.
You’ll be on your way to an 850 credit score in no time!