Credit History and Credit Score
You begin to establish a credit history as soon as you get your first credit card or get a loan. Your credit history includes information about the number of credit cards and loans you have and how conscientious you are about paying your bills. Your credit history impacts your credit score.
A credit score is a three-digit number that represents your creditworthiness. It is calculated based on your credit history, which includes information about your past and current credit accounts, payment history, credit utilization, length of credit history, and new credit inquiries.
Different companies use slightly different ratings, but [latex]300[/latex] or so is considered to be a low credit score, and [latex]700–850[/latex] is considered to be high. The higher your credit score is, the better.
Potential landlords, banks, loan companies, car dealers, and even employers will often ask for your name and social security number so that they can obtain your credit information. Every business is different, but many use credit scores to evaluate prospective customers and decide how responsible or risky they might be.
credit score
A credit score is a numerical value that lenders use to assess an individual’s credit risk, based on their past borrowing and repayment history.
A higher credit score indicates that you are more likely to pay back your debts on time, while a lower credit score suggests that you may be a higher risk borrower.
Components of a Credit Score and How to Improve Your Credit
Credit scores contain a total of five components. These components are credit payment history (thirty-five percent), credit utilization (thirty percent), length of credit history (fifteen percent), new credit (ten percent), and credit mix (ten percent).
What Is a Good Credit Score?
Most credit scores have a [latex]300–850[/latex] score range. The higher the score, the lower the risk to lenders. A good credit score is considered to be in the [latex]670–739[/latex] score range.
| Credit Score Ranges | Rating | Description |
|---|---|---|
| [latex]> 580[/latex] | Poor | This credit score is well below the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk. |
| [latex]580–669[/latex] | Fair | This credit score is below the average score of U.S. consumers, though many lenders will approve loans with this score. |
| [latex]670–739[/latex] | Good | This credit score is near or slightly above the average of U.S. consumers, and most lenders consider this a good score. |
| [latex]740–799[/latex] | Very Good | This credit score is above the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable. |
| [latex]800+[/latex] | Exceptional | This credit score is well above the average score of U.S. consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk. |
The main action you can take to improve your credit score is to stop charging and pay all bills on time. Even if you cannot pay the full amount of the credit card balance, which is the best practice, pay the minimum on time. Paying more is better for your debt load but does not improve your score. Carrying a balance on a credit card does not improve your score. Your score will go down if you pay bills late and owe more than thirty percent of your available credit. Your credit score is a reflection of your willingness and ability to do what you say you will do—pay your debts on time.
Resources for Credit Issues
Maintaining credit is a big responsibility, and sometimes it can be challenging. Repairing bad credit can take a long time—up to seven years—so it’s important to take action as soon as you’re having trouble paying bills or overspending. Different resources and options are available to help you deal with credit issues, including the following:
- Loan consolidation: Students may consider having multiple loans consolidated with the federal government so they have to make only one loan payment per month. While this consolidation may give you more time to pay off student loan debt, it may not be the best option, since the one monthly payment can cost more and accrue a higher interest rate. Students should talk to loan company representatives and financial aid resources at their institution to discuss other payment options, such as income-based payments in which the amount you pay each month is based on your income level.
- Credit counselors: Credit counselors are trained to help people develop personal budgets and to provide classes on savings and debt solutions. They may also offer debt management plans in which they work with your credit card and loan companies to arrange a deal and ask you for monthly deposits so that they can help you pay off your debts. If you are interested in a consultation from a credit counselor, you should ask family, friends, or your local government for references for reputable ones. You will also want to find counselors that do not charge customers too much for their services to avoid additional debt.
- Debt settlement plans: Debt collection companies will offer services to their clients that involve talking to credit card and loan companies and coming up with a plan to pay a lump sum instead of the total debt owed. Similar to finding credit counselors, you should contact local government offices to find reputable debt collection companies so you can avoid overpayments and scams.
- Bankruptcy: Bankruptcy is an official status that is obtained through court procedures, and it means that means you are unable to pay off your debts. People may file for Chapter 13 bankruptcy, which means they don’t lose any assets and have a payment plan of three to five years to pay off their debts, or Chapter 7 bankruptcy, which means they may have to surrender assets that can be used to pay off their debts. Bankruptcy damages your credit score, and the fees for filing paperwork and hiring an attorney can be costly, so it is important to consider other financial solutions first.