Understanding Your Credit Score and How to Improve Yours

When was the last time you looked at your credit score? What about the last time you pulled your credit reports? If you answered a year + or more ago, that’s too long!

I get it, understanding a your credit and how it works can be daunting. What makes up a good credit score? What type of credit score do you need to finance, well, anything? Who are the credit bureaus and how are they scoring you? How do I read my credit reports, let alone, request them?

I can guide you through all of this and more! Keep reading to find out.

So what is a credit score??

According to dictionary online, a credit score is “a numerical ranking of an individual’s financial creditworthiness based on spending and credit history”. Is that clear as mud, or what?

What factors into a credit score?

Believe it or not, several things are factored into this calculation, but they’re not too surprising. They are the following: Length of credit, payment history, amount owed, mix of credit, and recent credit inquiries.

Payment history makes up 35% of your score. You can see how important it is to pay your bills on time, every month!

Amount owed is next after payment history, which makes up about 30% of your score. I’ve read several different articles which talk about the amount owed and it goes all the way from 10% – 30% of your credit limit. So, really, who knows which one is right, but the lower you keep your ratio the better off you’ll be.

How high of a credit score do I need?

You need to have a score at least in the “good” range. This is typically around the mid 600 the mid 700 range. If you want to get a better rate at the dealership or bank where you’re applying for a loan, this is the range you would need. You might be able to secure a loan with a lower credit score than this, but you will end up paying more in interest in the long run.

How do I get my credit report?

In my opinion, checking your credit report is more important than knowing your score. The report is what drives the score in the first place, so knowing what is on it is very important. I once found a credit card that I didn’t remember opening! I also found past loans on my report that should have been closed for many years! So as you can see, it’s important to review. By reviewing each year, you will also be able to pinpoint any new inquiries or loans opened that you did not authorize.

You can get your report every year for free, and technically, you can get three each year for free. The 3 major credit bureaus: Equifax, Transunion, and Experian, each allow one free credit report pull a year.

Whenever a creditor, lender, etc. checks your credit report, it creates an inquiry on your report. This also can affect your credit score if you have a lot of them. However; when you check your own credit report, it doesn’t affect your credit, so please don’t worry about that. Inquiries from outside organizations fall off your credit report after 2 years.

What’s in a credit report?

Your credit report usually won’t tell you your score. However; you will find a history of your loans, credit cards, payments, old loans (up until a certain time), credit used, and anything derogatory will be included as well. Remember, payments and available credit are the two highest items that factor into your score, so these you will need to pay attention to.

What do I do if I have a bad credit report?

First things first, prepare a budget! Regardless of how you got to this point, you can get yourself out, it will just take time. Budgeting is the best thing to have in your tool belt. Every extra dollar you can put toward your outstanding debt, do that. Use the debt snowball method if that works for you! If you are behind on some bills, make sure to catch these up first while paying the minimum on everything else.

Unfortunately, it’s easier to tank your credit than it is to build it back up. BUT!! please don’t get discouraged, it WILL happen.

Trust me, I’ve been there. At one point I had almost $30,000 in credit card debt! This was mainly due to an ex-husband who drove it up, but it was also my fault because I wasn’t paying attention to what he was doing. I cut all my credit cards up at that point and just started attacking them with everything I had. This was all on one income and taking care of my 2 small kids at the time. It took about a year, year and a half to get my credit moving up again, but slowly it did and now I’ve been hovering in the low 800s for at least the last 4 years.

To wrap up, if you’re struggling with debt right now and underwater, build a budget. Next, cut up your credit cards (if you can) or, get rid of all but one to use for emergencies only. Attack your current debt, and put every extra dollar you can squeeze toward your debt. I’m a fan of the Dave Ramsey method: debt snowball.

>>>>Check out this post for more information on the debt snowball method<<<<<