Credit Score Basics: What You Need To Know

While we all know that good credit is important, unfortunately, many people don’t focus on their credit score until they need it. By doing so, they often overlook a chance to create a solid building block in their overall finances that can be leveraged for major (and sometimes minor) life decisions. Here are a few credit score basics that you should know.

A Good Score Is A Good Investment

Your credit score isn’t just important for the big things like a house or a car. It’s something any type of potential creditor will check, from your landlord to your cellphone carrier. While you may not be completely denied a service because of a lower score, you may be charged higher interest rates.

The personal finance company Credit Karma has analyzed interest rates and determined that, over a lifetime, the cost differential between someone with good credit and someone with excellent credit is more than $60,000. The cost of poor credit? More than $200,000.

A high credit score indicates to lenders that a loan will be less risky. Because of this, they will be willing to compete for these lower-risk loans by offering lower interest rates.

Credit Score vs. Credit Report

Your credit score is different from your credit report. To create your credit report, each of the major credit reporting agencies (Transunion, Experian, and Equifax) collect data on you from various sources, including companies, lenders, and court records. After collecting data on you, the reporting agencies will then package and resell it to businesses that request your consumer credit report.

These reporting agencies are required to provide you with a free copy of your credit report every year, but they aren’t required to provide you with your credit score. You can check your credit report each year – for free – by visiting annualcreditreport.com.

Your credit score is produced by the Fair Isaac Corporation (“FICO”) or by VantageScore. These data analytics companies have developed proprietary techniques for analyzing individual credit reports and determining consumer credit risk.

They report a standardized score between 300 and 850 that is a benchmark of creditworthiness. Credit scores can be purchased from any of the credit reporting agencies, or directly from FICO. They are relatively inexpensive, about $15.

The chart below details the range of credit scores, sorted by creditworthiness.

credit-score-chart

How To Make Your Credit History An Asset

If your score isn’t in the “Good” or “Very Good” range, there are several things you can do to improve it.

  • Consistently pay your bills on time. Even one late payment – more than 30 days after your due date – can damage your credit score.
  • If you don’t have enough credit history, you can improve it without taking on additional debt by taking out a credit-builder loan. This type of loan places the money you borrow into a certificate of deposit or savings account that you can claim after you make 12 monthly payments.
  • A secured credit card is also a good idea – it gives you a line of credit equal to an amount you have on deposit with the issuing bank.
  • Finally, keep your debt below 30% of your credit limit on your revolving accounts, like your credit cards.

The good news is that following these credit score basics can improve your score very quickly. You may find that you’ve moved into a higher category in as little as a few months.

A good credit score can turn into an asset that can help you make more money over time by paying less in interest. What if you have older “dings” on your credit report that aren’t so positive? Don’t worry, as long as you keep payments current, they will age off your report in about three years.

Pretty soon you’ll be turning the vicious cycle of paying additional interest into the virtuous cycle of saving and investing.

If you need help building your credit score and becoming debt-free, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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