what is a credit score

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you’re considering taking out a loan or credit card, you’ve probably checked your credit score to weigh your odds of getting approved. But what if it’s different depending on which scoring model you check?

Since you have multiple types of credit scores, the number can vary based on the scoring model. Continue reading to learn more about the different credit scores, including FICO® and VantageScore®.

Table of contents:

What is a credit score?

A credit score is a three-digit number that predicts your credit risk based on data from your credit report. Lenders use credit scores to determine who to approve for loans and at what interest rates. Credit scores typically range from 300 to 800 points. A high credit score indicates that you’re more likely to pay back your loans, while a lower credit score signals that you may be a risky borrower.

What are the different credit scoring models?

FICO and VantageScore are the two most popular scoring models used in the United States. Both models calculate your score based on a set of factors that assess an individual’s credit risk. However, the two models use different algorithms and assign different weights to each factor.

Let’s look at the different types of credit scores and how they stack up.

FICO scoring model

The FICO score was the first consumer credit score developed by the Fair Isaac Corporation (FICO) in 1989. According to myFICO, 90 percent of top lenders use FICO scores to determine loan approvals, interest rates and credit limits.

A good FICO score will help you secure better loan terms and rates. The latest FICO model categorizes your score based on these ranges:

  • 800+: Exceptional  
  • 740 – 799: Very good        
  • 670 – 739: Good
  • 580 – 669: Fair        
  • <580: Poor

VantageScore model

The VantageScore model was developed in 2006 by the three credit bureaus—Experian®, TransUnion® and Equifax®—as an alternative scoring model.

Like the FICO scoring model, VantageScore ranges from 300 to 850. According to Experian, here’s how the newest VantageScore model groups scores:

  • 781+: Excellent
  • 661 – 780: Good
  • 601 – 660: Fair
  • 500 – 600: Poor
  • <500: Very poor

Other credit scoring models

While FICO and VantageScore are the most widely used, they aren’t the only scoring models out there. Here are some lesser-known credit scoring models you may encounter:

  • TruVision Credit Risk: Developed by TransUnion, TruVision aims to broaden credit opportunities with insights beyond traditional credit information. The model combines “traditional, trended, blended and alternative data.”
  • OneScore: Unveiled in 2023 by Equifax, OneScore is a new scoring model aimed to paint a more comprehensive picture of loan applicants. According to a recent press release, OneScore is a “robust, multi-data score that leverages traditional credit history and differentiated alternative data.”
  • CE Credit Score: Created by CE Analytics, CE is an independent credit scoring model that uses advanced analytics and behavioral trends.

How are credit scores calculated?

Your credit scores are calculated based on a set of factors from your credit report. However, each scoring model assigns a certain weight to each factor to calculate your score.

Let’s look at how the FICO and VantageScore models calculate credit scores.

How is your FICO score calculated?

With the latest FICO scoring model, your history of paying past accounts on time is the most important factor when determining your credit score. Other factors include how much of your available credit you’re using, how long you’ve had your accounts, the different types of loans you have and how many new accounts you have.

Here’s exactly how FICO calculates your score:

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • Credit mix: 10 percent
  • New credit: 10 percent

How is your VantageScore calculated?

Like the FICO model, payment history is the most significant factor when calculating your VantageScore. Additional factors include the age of your accounts, how much credit you use, total balances on your accounts, new accounts you’ve opened and how much credit you have available.

Here’s a look at the factors that determine your VantageScore:

  • Payment history: 41 percent
  • Depth of credit: 20 percent
  • Credit utilization: 20 percent
  • Balances: 6 percent
  • Recent credit: 11 percent
  • Available credit: 2 percent

Why are my credit scores different?

It’s normal for your credit scores to be different. Here are a few of the main reasons credit scores vary:

  • Your score is calculated using different scoring models: Your credit scores may vary because there are multiple different types of credit scoring models. Since scoring models weigh certain factors differently, your score may vary slightly depending on which credit score you check.
  • There are different versions of credit scoring models: Each scoring model has multiple versions that periodically update. For example, FICO 8 and FICO 9 have key differences, such as the impact of third-party collections and rent payments.
  • Not all lenders report to all three credit bureaus: Another reason your credit score may vary is because some lenders don’t report to all three credit bureaus. As a result, one of the credit bureaus could be missing information that either increases or decreases your score.  
  • Credit scores update frequently: When you check your credit score can play a role in what number you see. Credit scores generally update at least once a month and sometimes even multiple times per month. So even if you’re using the same scoring mode, it’s normal for your credit score to fluctuate over time.

How to check your credit score

Accessing your credit score doesn’t have to be a hassle. Here are the easiest ways to check your credit score for free:

  • Credit bureaus: You can check your credit score via any of the three major credit bureaus—Experian, TransUnion and Equifax.
  • Your bank or credit card issuer: Most banks and credit card issuers provide customers with complimentary access to their credit score.
  • Third-party platform: Some third-party platforms provide free credit scores. For example, Lexington Law Firm provides a free credit snapshot, which includes your credit score and credit report summary.

Regularly checking your credit score and credit report can help notify you of inaccurate information that may be hurting your credit. If you notice errors on your credit report, it’s important to investigate and address them with the credit bureaus.

Learn how Lexington Law Firm’s services could help you effectively manage and monitor your credit today.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Reviewed By

Alexis Peacock

Supervising Attorney

Alexis Peacock was born in Santa Cruz, California and raised in Scottsdale, Arizona.

In 2013, she earned her Bachelor of Science in Criminal Justice and Criminology, graduating cum laude from Arizona State University. Ms. Peacock received her Juris Doctor from Arizona Summit Law School and graduated in 2016. Prior to joining Lexington Law Firm, Ms. Peacock worked in Criminal Defense as both a paralegal and practicing attorney. Ms. Peacock represented clients in criminal matters varying from minor traffic infractions to serious felony cases. Alexis is licensed to practice law in Arizona. She is located in the Phoenix office.

Source: lexingtonlaw.com

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Financing a car isn’t unlike taking out a mortgage. The principal is lower, but lenders will still take a peek at your credit score to see how much interest they should charge to compensate for the risk of lending to you. 

So what is a credit score? What credit scoring system do auto lenders use? Whether your credit score is 350 or 800, how can you improve your lending terms and save thousands on interest?

Let’s investigate credit scores and car loans. 

What’s Ahead:

What credit scoring system do auto lenders use?

Although everyone uses the same rough scale (300 to 850), different agencies calculate their version of your credit score differently. Your Equifax Credit Score, for example, might differ from your FICO score. 

In this article, I’m going to focus on your FICO score. It’s what most institutions use and is heavily favored by auto lenders for being accurate, widely used, and constantly innovated upon. For example, the 64-year-old company recently debuted the UltraFICO score, a next-gen credit score that combs through more variables and offers a meatier suite of tools for achieving and maintaining prime credit.

Until the UltraFICO becomes standard, the vanilla FICO score works just fine for 90% of lenders. Here’s precisely how your FICO score is calculated: 

FICO Score Factor Description % of total
Payment history Whether you pay your bills on time 35
Total Amount Owed Debts plus percentage of your credit you’re using 30
Length of Credit History Length of time you’ve had credit 15
Types of Credit Variety of loans (mortgage, car, student, etc) 10
New Credit Recent hard credit pulls 10

Your bank’s online dashboard should let you check your FICO score for free. You can also use myFICO to estimate your FICO score in under a minute. You will need to pay a monthly fee (there are three different price options), but you get way more features than the free credit score apps. 

The cheapest plan lets you check your FICO score specifically for auto loans, so you can rest assured that you know your exact score before walking into a dealership.

Now, what does your FICO score say about your viability to get an affordable car loan? 

What FICO score is needed for a car loan? 

If you’ve ever driven past a sketchy used car lot or watched The Price is Right on cable like I have, you’ve probably seen ads with marketing language like this: 

“BUY HERE PAY HERE!”

“$0 DOWN!”

“BAD CREDIT? NO PROBLEM!”

They’re all indicators that if you can fog a mirror, you can get a car loan. It just won’t be a very good one. John Oliver did an exposé on predatory car loans that’s worth the 18-minute watch. 

A better question is: what FICO score is needed for a good car loan? At what point should you instead focus on improving your credit first? Let’s dive in. 

How does my credit score affect my auto loan terms? 

Depending on your loan amount, raising your credit score by just a few points prior to purchase could save you thousands in interest. 

You can tinker with Money Under 30’s Auto Loan Calculator to see how your pretend credit score could affect your loan terms on a $25,000 vehicle purchase, leased over 60 months. 

Credit score APR Total interest paid on $25k loan over 60 months
Excellent (720+) 4.49% $2,958
Good (650-719) 7.65% $5.164
Subprime (550-649) 13.99% $9.895

From these numbers, you can see how your credit score can have a huge and pricey impact on your loan terms.

Low credit will likely drive up interest rates

If you have subprime (<650) credit, lenders will consider lending to you to be a higher risk. Therefore, they’ll charge you more interest to offset the risk. 

As illustrated above, if you can raise your credit to above 720 before taking out an auto loan you could save thousands in interest. 

Certain lenders may not offer you a loan at all

If you have subprime credit (or no credit at all), certain lenders may not even consider your case. On the flip side, however, improving your credit opens the door to better rates and better lenders. 

By choosing to only lend to prime candidates, some lenders can afford to offer extremely low interest below 4%. 

Oh, and here’s the thing about those “0% APR for 60 months” claims

You’ve probably heard claims that a dealer can offer you “0% APR for 60 months!” While technically true, 0% APR isn’t as good as it seems. 

First, and perhaps not surprisingly, it typically only applies to buyers who have excellent credit already. For everyone else, it’s just a misleading way to lure you into the dealership, only to be disappointed at the point of financing. 

Even if you do qualify for a 0% APR on a new vehicle, you may not be saving any money in the long run. As illustrated above, the total interest for someone with Excellent credit financing a $25k loan is around $3,000. If you’re offered a 0% APR loan on a new car, there are at least four possible realities as to why:

  1. The car is months away from being “last year’s model” and depreciating $4,000.
  2. The dealer has hidden $3,000 in fees somewhere in the walkout price.
  3. The car is terrible and nobody bought one so they need to make space.
  4. 0% APR is actually a good deal.

0% APR deals embody the old saying “if it sounds too good to be true, it probably is.” 

In reality, you’ll probably negotiate a deal with your lender or take some time to improve your credit score. On that note, what are some concrete ways you can improve the terms of your auto loans? 

How can I lower my interest rates? 

If you have subprime credit, here’s a playbook of ways you can lower your interest rates. 

Talk to the financier

Like auto insurance, auto loans are subjective, and financiers can be open to negotiation. Not all car buyers have subprime credit for the same reasons, and you can prepare a case for why you deserve prime credit interest rates without the score to support it. 

For example, if your credit score got pummeled by your student loans but you’ve never missed a car payment, that’s music to an auto loaner’s ears. Similarly, if you’re in debt from starting a business but said business is paying you a steady salary, that’s also fodder for negotiating.

Find a cosigner

There may be someone in your life with a high credit score who’s willing to cosign with you on the auto loan. Cosigning on a loan takes tremendous trust, as the other person will be financially responsible if you can’t make payments. 

However, you can make the case to them that you’ll remove them and refinance as soon as your credit score is high enough. 

Make a larger down payment

It’s simple math; a smaller principal means less interest. The more cash you can plunk down, the more you’ll save on interest.

Improve your credit

Perhaps the best option is to simply take a few months or years to improve your credit score. With strategy and patience, it’s not impossible. 

Taking time to improve your credit score will not only save you thousands on your auto loan, but could save you tens of thousands on your mortgage or other large loans down the road. 

Finance a cheaper car, or don’t buy one at all

You should never spend more than 35% of your annual pre-tax income on a car. You can see how much car you can afford using MU30’s Car Affordability Calculator. 

I personally own a luxury Japanese sedan worth $8,000 and a Japanese “fun” car worth $4,000. Both are paid off and cost $1,200 annually to insure. I want for nothing. Similarly, famous YouTube personality Scotty Kilmer spends most of his energy convincing viewers to buy less car than they think they need (he’s also a mechanic with 50 years of experience). 

Point is, you can live a great life with a cheap, reliable car. Expensive cars are expensive to insure and maintain, and most of them depreciate like an open carton of milk. So consider lowering your budget, or better yet, not buying a car at all – that’s the best way I know of to achieve 0% APR. 

Summary

Your credit score can have a huge impact on your auto loan terms. How big of an impact? Well, improving your credit score by just 100 points is near-guaranteed to save you thousands. 

If you don’t have the time to improve your credit, you can still negotiate prime rates with subprime credit by making your case to a lender. Be prepared to explain why your credit is subprime, and show proof that you’re ready to make on-time payments throughout the lifetime of the loan. 

Alternatively, you can also reduce your interest by simply spending less, finding a co-signer, or best of all, taking time to improve your credit. 

Read more:

Source: moneyunder30.com

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Are you looking for ways to start improving your credit score?

Check your credit score with Credit Sesame for free!

Whether you want to believe it or not, your credit score can play a major role in your family’s life.

While you shouldn’t go crazy and completely obsess over improving your credit score, it is important to learn more about them due to the impact they may have.

Your credit score can influence the interest rate you receive on a loan, buying a home, finding a rental home, attaining certain jobs, your insurance rates, and more.

Even though your credit score can impact your life in a big way, that doesn’t mean it’s hard to improve your credit score. Yes, it can be easy to wreck your credit score, but it can be easy to improve your credit score as well.

Due to this, I believe a credit score can be used to a person’s advantage.

Below is my complete guide to credit scores, so you can improve your credit score, receive your annual free credit report, learn how to use your credit score to your advantage, and more.

Check your credit score with Credit Sesame for free!

Here is how to start improving your credit score:

What is a credit score?

A credit score is a three digit number showing others your creditworthiness, and is often used as an indicator of how risky you are.

There are three main credit bureaus, which is why you may occasionally see different numbers. The main three (Equifax, TransUnion, and Experian) calculate scores depending on the information they have about you, and your file may be slightly different at each of them.

What is a good credit score?

Lenders and people who are checking your credit score usually have varying opinions about what a good credit score is.

In general, though, a good credit score is usually 720+. The higher your number, the better your credit score.

Is it easy to damage your credit score?

Improving your credit score usually takes a little more work than it does to damage your credit score.

You may be hurting your credit score if:

  • You have a high utilization rate. Keeping your balances below 20% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $200. Lenders like to see a low utilization rate as it shows that you are not maxing out your debt.
  • You cancel credit cards that may be helping your credit history.
  • You pay your bills late or not at all.
  • You never check your credit report and have errors listed.

Read more at These 4 Mistakes May Be Holding You Back From A Good Credit Score.

Can my credit score impact buying a home?

YES!

This is a big reason why improving your credit score is so important.

  • Your credit score can impact whether or not you are approved for a home loan.
  • Your credit score can impact how large of a home loan you are given.
  • Your credit score can impact the size of the down payment you are required to put down.
  • Your credit score can impact your interest rate.

Read more at How Your Credit Score Impacts Your Home Buying Process.

Why is improving your credit score important? What else can it impact?

There are many instances in which your credit score and/or credit report may be looked at, and sometimes they have nothing to do with a loan. It is important to work on improving your credit score, because you never know when you may need it.

Plus, it’s something you can personally control, so why not work on improving your credit score?

Home and car insurance – If you have home or car insurance, your rate may be calculated on a factor you didn’t know about – your credit score. If your credit score isn’t good, then you may actually be paying more because companies consider you to be riskier.

Employer – This may be shocking to hear, but there are some employers out there who will check your credit report (with your permission). Industries that often check your credit report include those dealing with financial services, chemical, and defense. I recently read a statistic that around 30% of companies will check a potential new hire’s credit report before making a hiring decision.

Renting a home – If you have decided you don’t want to own a home, do not think you have escaped having your credit history checked. Your landlord will most likely check your credit history. They will want to know if you pay your bills on time or if you have ever skipped one completely. This will say a lot about you as a renter, whether you want to believe it or not. If your credit history is not up to their standards, you may be denied the rental altogether, you may be asked to pay multiple months at once, or you may be asked to find a co-signer just in case you fail to pay your rent.

Credit cards – If you don’t care about credit, then you probably will not care about this one. However, if you want a credit card, especially one with a good rewards system in place, then you will want to work on improving your credit score. The good reward credit card offers are usually only available to those with good or excellent credit scores.

Loans (home, car, etc.) – If you apply for a loan, your credit score and credit history will definitely be checked. Before you are approved for a loan of any sort, the lending institution is going to thoroughly check your financial history so they don’t end up losing money on your loan.

The interest rate you receive – A good credit score can mean you qualify for a good interest rate, and a bad credit score may mean that you get a very high rate. I have seen a 24% interest rate for a car loan for someone before! A higher interest rate can mean paying thousands of dollars extra, so it is always best to work on improving your credit score.

How can I check my credit score and my credit report?

My favorite site for checking my credit score is Credit Sesame. Credit Sesame makes it extremely easy to check your score and both me and my husband have active accounts.

You can also receive one annual free credit report from the three main credit bureaus mentioned above. Yes, this means that you get one from EACH, so three each year. I recommend spacing it out so you can get one every 4 months. You can read more about this here.

What makes up a credit score?

There are five categories that make up your credit score. Your payment history and amounts owed equate to 65% of your credit history, but don’t forget the others as they still have an impact.

If you want to work on improving your credit score, you will want to keep the below credit score breakdown in mind:

  • 35% Payment History. Your payment history has the biggest impact on your credit score. This includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on.
  • 30% Amounts Owed. This is the next largest category when it comes to your credit score. This includes your balances, your utilization rate, and more.
  • 15% Length of Credit History. The age of your accounts come into play here. This is why it’s usually a good idea to keep a credit card that you’ve had for a long time. I still have a credit card I opened when I was 18. It has no rewards, but it improves my average account age. However, only do this if you know you won’t go into debt.
  • 10% New Credit. This category includes things such as how many hard credit inquiries you have and how long it’s been since you last opened a new credit account. It is important to remember that checking your own credit score does NOT impact this category as long as you receive your credit report from a company that is authorized to give you your credit report.
  • 10% Credit Mix. This includes the type of accounts you have, such as whether or not you have credit cards, a mortgage, car loan, and so on.

Check your credit score with Credit Sesame for free!

So, how can I improve my credit score?

After reading all of the above, I’m sure you’re wondering how YOU can increase your credit score.

Improving your credit score is not extremely difficult. Once you realize what can impact your credit score, you can make relatively easy changes that will begin to improve your credit score.

Here are my general tips for improving your credit score:

  • Make sure you pay all of your bills on time.
  • Regularly check your credit report. There is a chance that mistakes may pop up on your credit report, and this may be hurting you. If you find an error, you should fix it as soon as possible.
  • Keep your balances and utilization rate low. I recommend spending less than 20% of your available credit.
  • Ask for your credit limits to be raised.
  • Pay before your credit card balance is reported. Even if you pay your credit cards in full each month, your balances are still reported. To improve your credit score, you should pay your credit card in full before your balances are reported.
  • Keep your credit card accounts open if it makes sense (if you think you’ll go into debt with them open or if the annual fees aren’t worth it, you may want to think about closing them instead), so that you can lengthen your credit history.
  • When shopping for a loan, apply for loans within a short period of time instead of over several months.

This advice gives you the opportunity to improve your credit score so you can begin to use it to your advantage. Like I always say, though, make sure you are wise when it comes to your loan and credit card habits as you don’t want to go into debt.

Improving your credit score can be worthwhile, but taking on debt to do so is not.

Check your credit score with Credit Sesame for free!

Do you know what your credit score is? How has your credit score impacted you?

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Source: makingsenseofcents.com

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Do you want to learn how to build credit?

While you might be intimidated, it doesn’t have to be hard!

I learned how to build credit at 18 by opening a credit card offer that came in the mail. My first credit card had a small limit around $300.

I never maxed it out, and there were really no benefits. But, it didn’t have a monthly fee, and it helped me learn how to build credit fast.

My credit score is now over 800 and considered excellent.

I don’t rely on my credit score and credit history, but I know that it impacts my life in many different areas — from insurance, to loans, to my cell phone bill.

Whether you want to believe it or not, your credit score can play a major role in your family’s life.

While you shouldn’t go crazy and completely obsess over learning how to improve your credit score, it is important to learn what you can about your credit score and the impact it may have on your life.

Your credit score can influence the interest rate you receive on a loan or your home mortgage, finding a rental home, attaining certain jobs, your insurance rates, and more.

Because of this, I think that a credit score can be used to a person’s advantage.

Even though your credit score can impact your life in a big way, that doesn’t mean it’s hard to build your credit history and credit score. Yes, it can be easy to wreck your score, but it’s easy to learn how to build your credit score back up.

Check your credit score with Credit Sesame for free!

How to build credit.

 

What is a credit score?

Before we begin, I want to talk more about what a credit score is. If you want to learn how to build a credit score from scratch, then starting here is the key to understanding what you’re working with.

A credit score is a three digit number that shows others your creditworthiness, and is often used as an indicator to show how risky you are.

There are three main credit bureaus, which is why you may occasionally see different numbers. The main three (Equifax, TransUnion, and Experian) calculate scores depending on the information they have about you, so your history and score may be slightly different at each of them.

Related: How Do Credit Cards Work?

 

What is a good credit score?

Lenders and people who are checking your credit score usually have varying opinions about what a good credit score is.

In general, though, a good credit score is usually 720+. The higher your number, the better your credit score.

Is 600 a good credit score?

A 600 credit score is below average. But, do not fret. There are ways to increase your credit score.

 

Is it easy to hurt your credit history?

Learning how to build credit and improving your credit score usually take more work and time than it does to damage your credit score.

You may be hurting your credit score if:

  • You have a high utilization rate. Keeping your balances below 20% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $200. Lenders like to see a low utilization rate, as it shows that you are not maxing out your debt.
  • You cancel credit cards that may be helping your credit history.
  • You pay your bills late or not at all.
  • You never check your credit report and have errors listed.

 

Can my credit score influence my home buying process?

Yes, for sure!

This is a big reason why learning how to build credit is so important. Your credit score can impact:

  • Whether or not you are approved for a home loan.
  • Your interest rate.
  • How large of a home loan you are given.
  • The size of the down payment you are required to put down.

Read more at How Your Credit Score Impacts Your Home Buying Process.

 

Why is improving your credit score important? What else can it affect?

There are many instances in which your credit score and/or credit report may be looked at, and sometimes it has nothing to do with a loan. This is why it is important to work on building your credit score, because you never know when you may need it.

Plus, it’s something you can personally control, so why not learn how to build credit and start working on improving it?

Home and car insurance – If you have homeowners or car insurance, your rate may be calculated on a factor you didn’t know about – your credit score. If your credit score isn’t good, then you may actually be paying more because companies consider you to be riskier.

Employer – This may be shocking to hear, but there are some employers out there that will check your credit report (with your permission). Industries that often check your credit report include those dealing with financial services, chemicals, and defense. I recently read a statistic that around 30% of companies will check a potential new hire’s credit report before making a hiring decision.

Renting a home – If you have decided you don’t want to own a home, you may still need your credit history checked. In fact, your landlord will most likely check your credit history. They will want to know if you pay your bills on time or if you have ever skipped a payment entirely. This will say a lot about you as a renter, whether you want to believe it or not. If your credit history is not up to their standards, you may be denied the rental altogether, you may be asked to pay multiple months rent upfront, or you may be asked to find a co-signer just in case you fail to pay your rent.

Credit cards – If you don’t care about credit, then you probably will not care about this one. However, if you want a credit card, especially one with a good rewards system in place, then you will want to work on improving your credit score. The credit cards with the best reward offers are usually only available to those with good or excellent credit scores.

Loans (home, car, etc.) – If you apply for a loan, your credit score and credit history will definitely be checked. Before you are approved for a loan of any sort, the lending institution is going to thoroughly check your financial history so they don’t end up losing money on your loan.

The interest rate you receive – A good credit score usually means you will qualify for lower interest rates, while a bad credit score means higher interest rates. I have talked to someone with a 24% interest rate on a car loan, all because they had a very low credit score. A higher interest rate means paying hundreds or thousands of dollars extra in interest, and this is why it’s so important to learn how to build credit

 

What makes up your credit score?

There are five categories that make up your credit score. Your payment history and amounts owed equate to 65% of your credit history, but don’t forget the others factors!

If you want to work on building your credit score, here are the following factors that go into your score:

  • 35% Payment History. Your payment history has the biggest impact on your credit score. This includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on.
  • 30% Amounts Owed. This is the next largest category when it comes to your credit score. This includes your balances, your utilization rate, and more.
  • 15% Length of Credit History. The age of your accounts come into play here. This is why it’s usually a good idea to keep a credit card that you’ve had for a long time. I still have the credit card I opened when I was 18. It has no other rewards than improving my average account age. However, only keep cards open if you know you won’t go into debt.
  • 10% New Credit. This category includes things such as how many hard credit inquiries you have and how long it’s been since you last opened a new credit account. It is important to remember that checking your own credit score does NOT impact this category as long as you receive your credit report from a company that is authorized to give you your credit report. 
  • 10% Credit Mix. This includes the type of accounts you have, such as whether or not you have credit cards, a mortgage, car loan, and so on.

Check your credit score with Credit Sesame for free!

 

Here’s how to build credit from scratch:

After reading all of the above, I’m sure you’re wondering how you can build your credit score fast, especially if you have a low credit score or no credit at all.

Increasing your score and learning how to establish credit is not extremely difficult. Once you realize what impacts your credit score, you can make relatively easy changes that will begin to improve it.

Below are my general tips for building your credit score.

 

Get a credit card.

Okay, okay, some of you may be cringing at this tip. Credit cards are not for everyone, BUT if you know that you can be smart about it, opening a credit card is a way to build your credit history. It can one day lead to you being able to use your credit score and credit history to your advantage.

While your first credit card will probably have a low limit and a high interest rate, it can help you learn how to build credit.

If you are looking for options, I recommend reading Best Rewards Credit Cards | What You Need To Know.

And, I recommend reading Top 5 Credit Card Mistakes And How To Avoid Them before you get a credit card.

Now, there are other ways to learn how to build credit without a credit card. Continue reading below.

 

Pay your bills on time.

According to FICO, 35% of your credit score is determined by your payment history. One or two late payments most likely won’t prevent you from having a good credit score. However, continuing to miss payments most likely will.

No matter what the bill is, you should always pay it on time. Paying a bill late may lead to interest charges, late fees, and a drop in your credit score.

Yes, companies can report late payments to credit agencies. If you do happen to accidentally pay a bill late, do not panic, though. If you are quick enough, you can call the company and ask for some leniency so they won’t report it. 

I once underpaid my monthly mortgage payment by $10. I must have clicked the wrong number because I’m still not even sure how that happened. Luckily, I caught it quickly enough and my mortgage company realized that it must have been a mistake. They waived any late fees and also did not report it to anyone.

Other related tip on how to build your credit score from scratch: Pay your credit card bill before your balance is reported. Even if you pay your credit cards in full each month, your balances are still probably being reported. Some people avoid this by paying their credit card bills twice a month to keep their utilization rate low.

 

Regularly check your credit report.

It’s important to check your credit report regularly because it may include errors that negatively affect your credit score. The sooner you fix those errors, the sooner you can improve your score.

My favorite site for checking my credit score is Credit Sesame. Credit Sesame makes it extremely easy to check your score and both me and my husband have active accounts.

You can also receive one annual free credit report from the three main credit bureaus mentioned above. Yes, this means that you get one from EACH, so three each year. I recommend spacing them out so you can get one every four months. You can read more about this here.

 

Keep your balances and utilization rate low.

If you have a credit card, then you have a credit limit. However, just because you are given this limit doesn’t mean you should try to reach it.

I recommend spending less than 20% of your available credit.

In fact, you should always try to be below 30% of your credit limit if you want to have a good credit score. So, if your credit limit is $1,000, you do not want to spend more than $300. Any more than that will impact your credit score.

It’s also important to note that even if you are paying your balance in full each month that going over 30% of your credit limit can still negatively impact you. This is because your balance is reported on a monthly basis to the credit bureaus. In this case, it is best to pay off your balance or at least some of it before your next credit card statement goes live. Paying off all or a portion of your balance before the rest of it is due will keep your utilization rate low.

If your credit limit is low, then you may even want to request an increase. Of course, only do this if you trust yourself not to spend more. The key here is to not it all!

 

Be mindful of your credit history.

Keeping credit cards open can lengthen your credit history, and this can improve your credit score. However, only do this if it makes sense for you. If you think you will go into debt or if the annual feels aren’t worth it, then you may want to think about closing your cards instead. 

According to FICO, 15% of your credit score is from the length of your credit history. The longer your credit history then the higher your score may be.

If you want to learn how to build credit when you have none and you have old credit cards that carry no annual fees, you may want to think twice before you cancel them. Yes, closing them can help you simplify your life, but an old credit card may be lengthening your credit history and, therefore, improving your credit score.

Like I said, I still have the credit card I opened when I turned 18. The credit card stinks and pretty much offers no benefits. However, it’s the card I’ve had the longest. To keep it active, I just buy one thing a year (such as gum)!

Side note: There are many reasons why you may want to cancel your credit cards, though. If having credit cards leads to credit card debt (not being able to pay your balance in full every month), then it may be the best idea to cancel them.

Get your rent reported.

Did you know that paying your rent can help you improve your credit score?

If you have little to no credit or are struggling with poor or bad credit, by using ExtraCredit, you can report your rent and utilities to TransUnion® & Equifax®, so you can get payment history for bills you are already paying! Rent reporting can help you add more credit history and help you work your way to a strong credit profile.

You can learn more at What Is ExtraCredit? Here Are 4 Reasons You Need to Read This ExtraCredit Review.

How do I start building credit?

As a recap of the above, you can learn how to build your credit score by:

  • Getting a credit card (but be smart!)
  • Paying your bills on time
  • Regularly checking your credit report
  • Keeping your balances and utilization rate low
  • Being mindful of your credit history
  • Getting your rent reported

 

How can I build my credit if I have no credit?

As a personal finance blogger, I sometimes hear people say that you shouldn’t worry about your credit score because credit cards are horrible. However, I don’t completely agree with that.

Credit cards are dangerous for some people, but that’s not the case for everyone.

Learning how to start building credit and improving your score can end up saving you lots of money. It can lead to lower interest rates, lower down payments, and lead to more opportunities.

Having a good credit score doesn’t mean you use credit cards all of the time either, it means you’ve followed the tips in this article and have shown lenders, employers, and others that they can trust you. 

Check your credit score with Credit Sesame for free!

Do you know what your credit score is? Do you think learning how to build credit is important?

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