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Editor’s Note: Today’s post is authored by Erica Holland. In addition to her full-time role at a private equity firm, Erica runs a personal finance and lifestyle blog, ModMoney, where she simplifies personal finance in a relatable way, and dives into important “real world” topics seldom taught in school.
Most of us have swiped a credit card, paid a mortgage, or applied for a personal loan. Which also meanswe have a credit score that reflects how well we’ve managed it all. Monitoring your credit score may notbe the most glamorous task, but it’s an important one because a lot is at stake. Your credit score canimpact loan approvals, interest rates, insurance premiums, and even your next job! Here are some keythings you need to know.
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1. Your credit score comes from your credit report.
Every time you borrow or repay money, your activity is reported to the three big credit bureaus:Experian, Equifax, and TransUnion. Each bureau puts together a report that documents your credithistory, and that’s where your score comes from. You can pull these reports for free once a year bygoing to AnnualCreditReport.com. It’s important to check these so you can catch any errors and detectfraud.
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2. You have more than one credit score.
There are a variety of credit scores out there, but FICO is the most commonly used among lenders.However, even your FICO score can differ depending on when it was pulled and which of the threecredit bureaus it came from. In any case, most scores are based on the same formula with a scale of300-850, so they should only vary slightly. Anything over 670 is considered good, over 740 is very good,and over 800 is exceptional.
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3. There are five factors that determine your credit score.
Knowing how your score is calculated can help you isolate what you need to work on to improve it. Inorder of importance, your score is based on:
- 35% – Payment history: This one is pretty simple. It reflects your track record of making on-time payments.
- 30% – Utilization: This is the amount you owe as a percentage of your total credit limit. The ideal ratio is around 20%.
- 15% – Length of credit history: A longer history is better because it gives lenders more insight into your behavior. If you just started developing a credit history, it may be hard to get a score in the 800s right away.
- 10% – New credit inquiries: Each time you apply for a new card or loan, the issuer makes an inquiry into your credit history, which dings your score by a few points.
- 10% – Types of credit: Lenders like to see that you can manage a mix of retail accounts, credit cards, mortgages, and other personal loans. If you don’t have a broad mix of credit, no biggie. It’s the least important factor.
I spoke about these factors and how you can improve them in The Ultimate Guide to UnderstandingYour Credit Score. And if you ever wondered how you can responsibly use a credit card to build up yourcredit score, check out 5 Credit Card Rules You Should Definitely Be Following.
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4. Your score can impact your life in a variety of ways.
Have you ever had a friend who borrowed some cash and never returned it? Chances are, you’rehesitant to lend her any additional lunch money. Similarly, prospective lenders use your credit score toevaluate your risk as a borrower. This manifests itself in several ways. First, your score dictates whetheryou are approved for a credit card, a mortgage, an apartment lease, a car loan, or any other personalloan. A low score can also cost you serious cash because it determines your interest rates. If lendersperceive you as a risky borrower, they charge you a higher rate to protect themselves. Plus, a low creditscore also means higher insurance premiums and security deposits on your utility bills. Finally, yourcredit score can show up on employee background checks. Nobody wants to be rejected from theirdream job because of a poor credit history!
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5. You can monitor your score for free.
Several credit card issuers offer their cardholders a free FICO score. Additionally, technologyapplications have made it easy to monitor and improve your credit score. Credit Karma is one such appthat provides access to your credit score and credit reports for free. Credit Karma also makes it easier toraise your score because it tells you exactly where you stand on each of the five factors. Now that yourscore is free and accessible, there’s no excuse not to monitor it.
FAQs
What's in my FICO® Scores? FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
What are the 5 C's of credit score? ›
The 5 C's of credit are character, capacity, capital, collateral and conditions. When you apply for a loan, mortgage or credit card, the lender will want to know you can pay back the money as agreed. Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more.
What are 5 things found on a credit report? ›
These five categories are: identifying information, credit accounts, credit inquiries, bankruptcy public records, and collections.
What are the 5 credit score factors and explain each? ›
The five biggest factors that affect your credit score are payment history, amounts owed, length of credit history, new credit, and types of credit.
What are the 5 levels of credit scores? ›
a good or fair credit score? Credit scores typically range from 300 to 850. Within that range, scores can usually be placed into one of five categories: poor, fair, good, very good and excellent.
What are the basics of credit score? ›
A credit score is a number that depicts a consumer's creditworthiness. FICO scores range from 300 to 850. Factors used to calculate your credit score include repayment history, types of loans, length of credit history, debt utilization, and whether you've applied for new accounts.
What are the 5 ways credit scores are calculated? ›
A FICO credit score is calculated based on five factors: your payment history, amount owed, new credit, length of credit history, and credit mix. Your record of on-time payments and amount of credit you've used are the two top factors.
How to get 5 points on credit score? ›
To raise your credit score by 5 points, you can dispute errors on your credit report, pay your bills on time and lower your credit utilization. Credit scores rise and fall based on the contents of your credit report, so adding positive information to your report will offset negative entries and increase your score.
What are the 5 P's of credit? ›
Different models such as the 5C's of credit (Character, Capacity, Capital, Collateral and Conditions); the 5P's (Person, Payment, Principal, Purpose and Protection), the LAPP (Liquidity, Activity, Profitability and Potential), the CAMPARI (Character, Ability, Margin, Purpose, Amount, Repayment and Insurance) model and ...
What are the 5 pillars of credit? ›
Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.
What are the 5 areas where credit is important? ›
The five Cs of credit are character, capacity, capital, collateral, and conditions. The five Cs of credit are a crucial framework used by lenders to assess the creditworthiness of potential borrowers.
Which answer lists the 5 C's that determine credit worthiness? ›
The five C's, or characteristics, of credit — character, capacity, capital, conditions and collateral — are a framework used by many lenders to evaluate potential small-business borrowers.
What are 5 examples of info not in a credit report? ›
Your credit report does not include your marital status, medical information, buying habits or transactional data, income, bank account balances, criminal records or level of education. It also doesn't include your credit score.
What are the 5 elements that creditors use to determine your credit rating? ›
There are five main factors that impact your credit score: 1) payment history, 2) credit utilization, 3) length of credit history, 4) new credit applications, and 5) the amount and variety of lenders.
What are the major factors to consider for credit scoring? ›
Payment history and your credit utilization ratio are the two top factors that affect your credit score. Payment history shows your ability to make payments consistently and on time. This factor is so heavily considered because lenders will want to know how reliable you are when it comes to paying back your debt.
What are the 4 C's of credit score? ›
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness.
