Ultimate Guide to Your Credit Score

Building your credit score in the United States can be a frustrating game.  You don’t want to go into more debt, but you need your credit score to get car insurance, a home mortgage, or sometimes even a cellphone…but how do you do this?

Before we go into how to build credit without a credit card, we need to understand what a credit score is, and what makes up your score.

What is a Credit Score?Building a Perfect Credit Score

A credit score is traditionally a number that tells lenders how likely you are to pay back a loan.  The higher your number is, the more likely you are to get agreeable terms on your next loan, mortgage, or car insurance.

It ranges anywhere from 300 to 850, so the closer to 850 you are, the better!

How is Credit Score Calculated?

Your credit score is comprised of 5 factors:

    • your payment history
    • your amounts owed
    • length of credit history
    • new credit
    • credit mix

Nobody knows the exact percentage that each category makes up but MyFico.com says the following:

    • Payment history accounts for 35% of your credit score
    • Amounts owed accounts for 30% of your credit score
    • Length of credit history makes up 15% of your credit score
    • New credit is 10% of your credit score
    • Credit mix accounts for 10% of your credit score

Payment history

While these are all approximate percentages, they give you an idea of how much each category is worth.  You have to make sure you pay back all of your loans on time because this is the most important factor!

A missed payment can stay on your credit score for up to 7 years so when you miss a payment, you will regret for a while into the future.

As long as you keep your accounts in good standing this portion should not be an issue.

Amounts Owed

Having credit accounts will not be a red flag for creditors as long as you are not using too much of your available credit.  I always suggest keeping your credit accounts under 20% of your available credit because this will show creditors you are not stretched too thin and will always be able to pay your loans.

Always paying your loans on time and sometimes even early will help creditors believe that you will always pay them.  Never use too much credit at a time.

Credit Mix

I truly do suggest becoming completely debt free at trying to avoid loans in the future.  However, I understand that this is not always realistic.  Factors of Credit Score

Retail accounts, loans, leases, rent and mortgage payments, and student loans are all ways to improve your credit mix.  Again, I do not suggest retail accounts, leases, loans, or student loans so that leaves us with rent payments and mortgage payments.

There are a lot of rental properties in the United States that are willing to report your rent payments to the 3 major credit bureaus.  You should try to have this done to help boost your credit score.

New Credit

Try not to open too many new credit accounts in a short period of time because that can be a red flag for creditors.  I suggest waiting approximately 10-12 months between new accounts.

Each time you apply for a credit account, your score will decrease in the beginning so be careful! As you make your payments, your score will go back up but it takes time.

Credit Score vs Credit Report – What’s the difference?

If you are looking for the difference between a credit score and a credit report you came to the right place.  To make it simple, a Man shrugging his shoulders with a question mark above his headcredit score is a number that is based on your credit report.

The report lists out all of your credit including mortgages, rent payments, student loans, credit cards and more.  Your credit score shows potential lenders how likely you are to pay off your loan.

What are the 3 Credit Bureaus?

Equifax, Experian, and TransUnion are the 3 major credit bureaus in the United States. They each have their own algorithms to calculate your credit score.  The most important one, though, is the Fair Isaac Corporation’s, FICO score.

The FICO score is the one that is used by most lenders so this is the one I suggest paying the most attention to.  It is made up of all 5 of the above factors; payment history, amount owed, length of credit history, new credit, and credit mix.  It ranges between 300 and 850 with 850 being a perfect credit score.

According to Investopedia, an exceptional credit score is anything over 800.  The following is a breakdown of exceptional, very good, good, fair, and poor credit scores.

    • 800+ is an exceptional score
    • 740-799 is considered very good
    • 670-739 is a good score
    • 580-669 is a fair score
    • <580 is a poor credit score

Lastly, the 3 credit bureaus created a credit score called the VantageScore.  This is not as popular as the FICO score but is made up of mostly the same factors.  This score also ranges from 300 to 850 but the factors are weighed differently.

    • Your payment history makes up 40%
    • your depth of credit makes up 21%
    • your credit utilization makes up 20%
    • balance is 11%
    • credit applications makes up 5%
    • available credit is 3%

What is the Highest Credit Score?

The highest credit score that you can have is 850.  This number is really hard to reach and can take many years.  If you do manage to reach 850, you can save a significant amount of money down the line due to the lower interest rates you will get.

What Does your Credit Score Start at?

Your starting credit score is 300 points.  As you apply for loans, pay rent, or pay mortgage payments, you will start to increase this.  It can take years to get it up to a great score a 300 score is your starting credit score.

How Can I Check My Credit Score For Free?

There are so many sites and even banks that will give you your credit score for free.  Websites like Credit Karma, Credit Sesame, and freecreditscore.com will give you your credit score for completely free, but there is only one website that is sanctioned to give you White piggy bank with dollar sticking outyour entire credit report: https://www.annualcreditreport.com/

This website was created by the 3 credit reporting bureaus to help you easily access your full credit report from each bureau.  You are allowed to pull your credit report 6 times per year for free.

Why Are My Credit Scores Different?

Credit scores can differ from credit bureau to credit bureau.  Each bureau has a different algorithm to calculate your credit score.  Different lenders also sometimes report your payments to certain bureaus which also can help to change your credit score from bureau to bureau.

Everytime that you pull your credit report, make sure that you look at all 3 of the reports to get a comprehensive idea of your credit history.  Even though most lenders use your FICO score to calculate whether or not to give you a loan, some look at different things! Check them all out to be sure there are no issues.

How Long Does it Take to Build Credit?

According to Self.inc, it can take anywhere from 3-6 months or at times even longer to start building credit. This is about the amount of time it will take for you to consistently make your payments on time, and for the lenders to report it to the credit bureaus.

The problem is it is a lot easier to trash your credit than it is to build it.  It only takes one missed payment to drop your credit score by a sizable amount.

Negative Items on Credit Report

If you have some negative items on your credit score you have a few options.

  1. Reach out to the creditor.  Ask them if they would be willing to make a goodwill adjustment for you.  This is mostly used for late payments as long as they aren’t greater than 30 days late.  You would have to write a letter to the creditor asking them to have it removed.  I also suggest giving them a call to follow up.  You never know!  Maybe you will get a nice person on the phone who is willing to remove it for you.
  2. Reach out to the credit bureaus.  You can dispute late payments, if you believe they are not correct.  When you file a dispute with the bureaus, they will forward it to the creditor asking them to review it.  If they find that they made a mistake, it will be removed.
  3. Wait 7-10 years. The only other way to remove a negative mark on your credit report is to wait 7-10 because that is how long it takes to be removed.  If it is just a late payment, it will take 7 years, but if it is a bankruptcy it will take 10 years to be removed.

Lexington Law mentions the following numbers:

    • A late payment can decrease your score by as much as 110 points
    • A debt settlement can decrease your score by 125 points
    • A foreclosure can decrease it by 160 points
    • A bankruptcy can decrease it by up to 240 points
    • A collection can decrease it by 110 points
    • A hard inquiry can decrease it by up to 15 points.

How to Avoid Late Payments

There are many things that you can do to avoid late credit payments.  I am going to list out a few of my favorite things!

  • Don’t take out credit you can’t afford to pay.  Make sure that you are able to pay off any credit that you take out.  If you are looking at taking out a mortgage, make sure that it is less than 25% of your entire income.  This will help you to avoid taking out too large of a mortgage.  I do not suggest taking out credit cards unless you are extremely focused.
  • Set up automatic payments.  Setting up automatic payments will help you avoid EVER being late on your payments.  The money will automatically come out of your account at a certain time every month.  If your mortagement payment is due on the 15th, I suggest setting up the automatic payment to come out on the 10th to give it extra time to go through.
  • Think before you buy.  OK, even though I suggest avoiding credit cards, if you insist on taking one out, always consider what you are buying before you buy it.  Credit card debt can rack up extremely fast so try to think about whether or not you need the thing that you are buying before you buy it.  This is my personal favorite of the 3 tips for avoiding late payments.

To Sum It Up…

To sum it up, building your credit score is not easy, but understanding what factors go into your score is easy!  Hopefully after reading this blog post, you understand what your credit score is, what a good credit score is, how to dispute credit disparities, and how to avoid late payments in the future.

If you have any other tips for avoiding late payments, tell me about them in the comments section below!