• Kavya Ravikanti

Back to the Basics: Credit Scores 101

The words credit and credit score get thrown around in a lot of different contexts. Whether it’s a spam call telling you that the IRS needs your credit information (this happens but it’s fake af) or your credit card company pushing their latest credit score tool or your new landlord asking you for a credit report, it’s important to understand what it is and how it might impact you. So let’s jump right in!

The What

Credit can actually refer to a few different things and is often used to mean different things (notice how many times it popped up in my first paragraph), but for our purposes:

Credit is the ability to borrow money or access goods or services with the understanding that you’ll pay later.

This can come up in multiple forms, with the credit card being one of the most popular forms of credit.

A credit score, on the other hand, is a number (typically in the range of 300–850). It is simply a measure of how risky you are for a lender to give you credit. A higher credit score means you have good credit and that you’re less of a risk to loan money to. A lower credit score means you have bad credit and that you’re more of a risk.

That’s it. The goal of the game here is to maintain as high a credit score as possible but to do that we need to understand how it’s calculated.

The Why

The bottom line is it’s important because our credit history and credit score might pop up when applying to rent a place, change your phone service, and when applying for a loan so it’s super important to pay attention to.

A higher credit score can make you eligible for premium credit cards, better interest rates on cards and loans, and make the process of getting a loan easier in the first place.

The How

credit bureau: agencies that calculate your credit scores by collecting credit information, they create credit reports that they sell to lenders/creditors who are making decisions on granting loans

Equifax, Experian, and TransUnion are the biggest bureaus around. Each of them has their own credit reports so if you were to ask each of them for your credit score you would end up with three different scores. However, they follow 2 main scoring models: FICO and VantageScore so these scores should not differ by much when looking at the same model.

Here is how your credit scores are translated:

Credit: badcredit.org

FICO is the most popular and the oldest scoring method, while VantageScore is a newer model but still used fairly widely. There are other models as well but FICO is what we will dive into as they are very clear about what goes into their score and how these parameters are weighted. There are a variety of FICO scores as well, but we’ll break it down in the context of credit cards.

1. Payment History (~35%) Quite simply, have you been paying your past credit card payments on time? If you pay your credit card bill every month and aren’t racking up interest or missing payments, you are good to go.

This is the most important factor and one of the easiest things for YOU to control!

HOT TIP: Set your credit card bills on autopay each month so that you don’t forget to pay them!

2. How Much Debt Are You Using (~30%) Lenders also like to know how much of your available credit you are using. Having debt is not a bad thing, but if you are using 90% of your available credit, lenders get a little bit nervous and think that you are at a higher risk of default*.

*default: when you fail to pay back your credit or loan

3. How Long You’ve Managed Credit (~15%) Although just 15% of your credit score, one of the easiest ways to increase your credit score is by starting early. A longer credit history shows more trustworthiness to lenders.

Diving a little deeper into this, the length here can refer to, the age of your oldest account, the age of your newest account, and how long since you have used certain accounts. So if you don’t have a credit card, I would urge you to open one so that you can start building your credit!

HOT TIP: My first credit card is the Wells Fargo Student credit card. Although I have switched to better credit cards, I keep this account open since it’s my first credit account. To keep it active, I use it only for my Spotify subscription and set it on autopay, so that I don’t even have to think about it but it continues to keep my credit score healthy.

4. Types of Accounts (~10%) A FICO score will also take into consideration your mix of credit cards, loans, mortgage, and other types of financial accounts.

However, this does not mean you go out and open each and everyone right away or that you need one of each. It’s not as big of a factor compared to the first 3 but people with fewer accounts are generally viewed as riskier compared to those with more accounts.

5. Number of Credit Inquiries (~10%) Another reason to NOT go out and open 6 different financial accounts at once is that the number of credit inquiries is a factor in your credit score as well. Opening up a new credit card or applying for a loan can involve a look into your credit score. FICO will consider the number of inquiries within the last 12 months and an inquiry will stay on your account for 2 years.

But wait..does how much I money I have or my net worth not matter? Nope, your actual wealth or how much money you have is not considered by your credit score!

Similarly, race, religion, nationality, gender, marital status, employment history, where you live, or your occupation are also not taken into consideration.

TLDR; If you take nothing else from this article, understand the following:

  1. Credit scores are important because they show lenders how trustworthy you are when it comes to borrowing money and paying it back on time. If you want to switch to new phone service, rent an apartment, take out a loan for grad school, or buy a house in the future, your credit score is KEY.

  2. To maintain a good score, simply pay your bills on time and don’t use too much of your credit at once. One of the easiest ways to start building your credit score is to open up a credit card account.

So this is all great Kavya, but where can I check my credit score? Great question! There are a couple of ways to check your credit score for FREE. Just remember that some of them may be pulling a VantageScore and others might be pulling a FICO Score and using any one of the three credit bureaus.

  1. Your credit card company might have a tool or service that allows you to check your score for FREE so check with them first.

  2. Experian will allow you to see your FICO Score 8 for free through their FreeCreditScore website, it’s updated every 30 days.

  3. Capital One and Chase allow anyone to check their TransUnion VantageScore 3.0 score for free through their tools. If you own their credit cards, use your account credentials instead of creating a new account.

If you’re curious to see what information a credit bureau has on you, you can get a FREE credit report from each of the three bureaus once every 12 months. This is a right you have authorized by federal law, so check it out here. These will not include a credit score but rather a more general report on your credit history and activity.

Phew, I know that was a lot, but hopefully, this 101 to credit scores was helpful! If you want Young, Not Broke content delivered straight to your inbox subscribe here and if you have any questions — email me at kavyasrir1998@gmail.com.

Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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