Credit. Score. You know what those two words mean, but do you know what they can do together? They have the power to open doors to your future, to wonderous opportunities of low interest rates and smaller deposits. Or they have the power to lock you out and throw away the key (for a while at least). A credit score is designed to give people in the financial world an idea of how likely you are to pay them back those big, official IOUs. You'll need a good credit score if you want to get good interest rates on a credit card, a larger loan for a car or house, and sometimes can determine how much you pay for your phone or utilities.
There are three companies that determine your credit score. It's kind of like if you have three different teachers grade an essay. They all have the same information and should give you about the same grade. But why three? Let's say that on a dare you put a frog into one of those teacher's desks and scared the bejesus out of them. Now they just really, really has it out for you and will fail you no matter what. Would it seem fair to only be graded by this horrible judge of character when you actually did pretty well on that essay? Nah. If all three of them grade the essay you're more likely to get a legit score. So you get three credit scores with the idea that if one of them has wrong information (or can't take a joke), the other two will kind of save your bacon.
Your credit score will fall somewhere between 300-850. This isn't golf, you want the highest score possible. You always want to work to improve your score, but anything over 740 should help you sit pretty for a while. If you dip below 620, you're in trouble and might have a hard time convincing anyone to give you money. It's kind of like a Catch-22, you have to use a credit card (or accumulate some type of debt) to show them you can pay off your debt. Go figure. (We'll talk about smart ways to jump start that credit score later.)
Your score is figured out by considering five different factors.
Paying your bills and doing it ON TIME EVERY TIME. For reals, there are a billion reasons why this is a good idea. Just do it.
Amount of Credit You're Using:
Remember how you get a credit limit when you sign up for a credit card? It's that super awesome and responsible thing that caps off your spending spree. Credit scorers want to see that you use your credit well-- you're not going crazy and hitting that cap every month. No, you want to have low credit utilization. (Big word. We'll explain more in a later lesson.) For now, just know that you don't want to max out your credit cards. Only spend 10-30% of your limit each month. This shows that you are smart and the loaners feel better about your spending, knowing they're more likely to get their money back. (They just really love their money and want it back).
Length of Credit History:
We already talked about how this is kind of a weird one when you're first starting. But the longer you keep your lines of credit active, the more reliable you seem to the credit kings and thus the higher score you will get. Money management is a marathon, not a sprint. Sure you can manage credit card bills or car payments for 3 months, but can you handle them for 3 years? Or 10 years?
Kind of Accounts:
This is a little less important, but still a credit score factor. Credit bureaus want to see that you can manage different types of accounts. Credit cards are revolving accounts, where the balance may change every month. Car or student loans are called installment loans (large sum you borrow once and pay down a portion each month), where the amount stays the same. They want to see you can manage both.
Every time someone checks on your credit score, it's called an inquiry. These check-ins happen when you are applying for a new line of credit, like a car loan, student loan, mortgage, or a credit card. While one or two inquiries may not affect your credit score, too many inquiries makes you look desperate and flighty because it looks like you're hard for cash and ready to go into debt. (And remember, the last thing these people want is to give you money they're not going to get back, so if you look a little too thirsty, they're not going to shell out any moolah.) Steer clear of signing up for too many things at once. One or two is NBD, but just cool your jets before things get out of hand. Things like getting preapproved for a card or checking your own credit score will not count against you.