Dani’s Declassified Guide to Credit Scores

To build upon my recent post about personal finance, this month we are discussing credit scores. Credit scores are an important part of the money management equation and now that I have an 800+ credit score, I want to share what I have learned in the process. There’s no really a right or wrong answer in terms of personal finance as personal finance is well…personal.

Disclaimer: I am not a licensed attorney, accountant, or financial advisor. The information below is for educational purposes only and not a substitute for professional legal, tax, investment, financial, or other advice.

Introduction to Credit and Credit Scores:

A credit score is typically that three-digit number, and it’s designated to be the likelihood that you’ll pay your bills on time. There are many different credit scores and scoring models, but the most widely known is the FICO. FICO is a credit score that was created by the Fair Isaac Corporation. And just to give a little bit of statistics, 90% of lenders use that FICO score, so that’s why I usually default to talking about the FICO score. And they’re kind of important because, generally, if you have a higher credit score, when you’re going to take out a loan for housing, or a car loan, if you have a higher credit score, you’re more likely to get, one, get a loan—be approved for a loan—but also getting a lower interest rate.

So the higher your credit score, usually the lower interest rate that you would get. And then you kind of alluded to this. Into the FICO score particularly, there’s five main categories. So kind of going back to college when you’re thinking about that syllabus, when you, you know, fill in this week or first week, not everything that you have for that class is weighed the same. So tests are weighted more, most likely, than homework. So it’s these five categories that are weighted differently, that add up to that three-digit score.

So going into those five categories:

About 35% is your payment history. So again, 35%. So if you can, and most of them do, if not all, setting up automatic payments when you have a credit card is very important because one miss payments can affect that majorly.
The second is the amounts owed, also known as that credit utilization. So when I first got a credit card, they approve you for X amount of dollars. So if I had, for example, a credit limit or credit of $2,000, and I used all $2,000 of that, then I would have a hundred percent utilization, which is not too good looking in terms of the credit score. Usually, I think on average, they say maybe 15 to 30% is where it is good to use for that credit utilization, because that’s 30% of that total score.
There’s the 15% that’s based on your length of credit. So that’s kind of what I’m alluding to in talking about that I got a credit card when I was in college. So I’ve had a credit history for nine, almost ten years now. So that really helps to boost your credit card of showing that I am consistent on paying my bills, I’m only using a small part of that utilization, but also showing that over amount of time. Showing that over two years and showing that over nine years can kind of help increase that score.
10% is that credit mix or different credit lines, so that could be auto or, like I talked about student loans.
10% is that new credit or that total number of accounts. So every time you get a new credit card, that doesn’t look too good. So if you’re getting credit cards — Try not to get credit card after credit card after credit card. That will temporarily affect your score and lower it.

My first credit card was the Discover It card which has student-specific versions that are built for college students. If you are not approved for this, I reccomend that you try one of these alternatives:

Asked to become an authorized user on someone else’s card, like a parent or close relative. This may help build your credit, depending on the issuer and if they report to the credit bureaus. The card will have your name on it, but the primary cardmember will be responsible for making payments. This can be especially helpful if the primary user has a long and healthy credit history with no late payments.
Apply for a secured credit cards – These cards require a refundable security deposit to open. The amount of your security deposit is usually your credit limit.

Once you have a credit card, I reccomend immediately setting up automatic payments since even 1 missed payment can have a large negative effect on your score.

Want to know what your current credit score is? You should check your credit report.

Other questions about personal finances? Add a comment here or reach out to me on Instagram.

Calls to Action:

Consider opening up a credit card if you don’t already have one. I suggest the Discover It card. Next, immediately set up automatic payments so that you never miss a payment.
Add calendar reminders to check one of the three credit reports every three months (For example, put one in April to check the Experian, and then August to do Equifax and then December TransUnion, so that you’re using all three of the ones that you get every 12 months – I happy to talk about credit reports more in a future post if you are interested!)

Other sources to learn more: