Credit scores have been around since the end of the 20th century. Despite all this time, many Americans and Canadians have false beliefs about the credit system governing our lending opportunities.
In North America, your creditworthiness is based on your credit history, giving more people an opportunity. Below, we will learn a few tricks to improve our credit and demystify many false beliefs about it. Let’s begin.
What Is a Credit Score?
When we are young, a good credit score isn’t atop our list of priorities. As we grow older, that score becomes more and more important to be able to borrow money to finance various life projects such as a first car or home. The credit score we employ today was established in 1989 by the Fair Isaac Corp (NYSE: FICO).
It is known as the FICO score. Most financial institutions across the US and Canada use this method to grade their potential lenders. They range from 300 to 850 and are categorized into five different ranges:
- Excellent (800–850): Subprime interest rates and easy access to credit
- Very Good (740–799): Competitive rates and easy access to credit
- Good (670–739): Advantageous rates and easier access to credit.
- Fair (580–669): Higher rates and difficulty obtaining credit.
- Poor (300–579): Bankruptcy or multiple defaults that stay on your credit report for up to 10 years. It isn’t easy to obtain new credit, and it’s time to improve your credit score. More on this later.
The main credit agencies in North America are Equifax, Experian, and TransUnion. Your credit score will differ in every credit agency as they do not have the same financial information. When checking online, it is important to always do so with the same agency.
VantageScore
In 2006, the three agencies mentioned above developed a score to address the issue of varying credit scores between agencies. The VantageScore is slightly different from the FICO score.
It uses AI to give lenders a unique credit score that is then transmitted to all three agencies. Despite this advantage, 90% of all lenders are still subject to the FICO score.
Credit Score Factors
As mentioned earlier, working on your score from an early age is essential for your upcoming lending opportunities. Your first credit card and phone bill have a much bigger impact on your future than you think.
Paying all your bills on time is very important. There are five main factors to calculating a credit score, and they each weigh differently toward the total score:
- Payment history (35%): Pays bills promptly.
- The total amount owed (30%): Credit utilization (credit used/credit available) This ratio should be at most 30%. The lower it is, the better.
- Length of credit history (15%): When your credit history began. The earlier, the better.
- Types of credit (10%): Having different credit uses (mortgage, car loan, credit card, utility bills, etc.) is better than having one credit card.
- New credit (10%): New credit applications and inquiries. Please don’t leave them pending or have too many refused.
Now that we know what impacts our credit score, how do we maintain it above 740? Let’s find out in the next section.
How to Improve Your Credit Score?
To learn how to improve and maintain your score, we must go back to the five factors mentioned above. They’re very important throughout your credit journey, no matter your age.
Payment history: Keep paying your bills on time. Don’t miss a payment by more than 30 days. It will immediately affect your score and be marked on your credit score for years. In case of bankruptcy, it will remain on your report for up to 10 years, depending on the type of bankruptcy. Lenders will know you’ve filed for bankruptcy previously, making it nearly impossible to obtain some credit.
The total amount owed: Your credit utilization should be around 30%, meaning if you have $10,000 in credit available, you should owe no more than $3,000. This doesn’t mean you shouldn’t treat yourself and buy a new car or home, but stay reasonable.
Length of credit history: The earlier you begin, the better. One important note here is for married couples and travelers. For the former, don’t let your spouse pay all the bills; have everything under their name. Keeping some bills or a credit card in your name is important to keep your credit history going. For travellers, always keep a credit card active and use it to show you’re still using borrowed money. One monthly transaction can be enough, but more is always better.
Types of credit: Some loan types have more advantageous credit conditions than others. It’ll be better for your credit score and your wallet to diversify your credit.
New credit: Don’t apply too often for new credit cards or other loans unless necessary. They will negatively impact your credit score. Instead, look for pre-approvals with your financial institution. If you have a very good credit score, you are more likely than not to be pre-approved.
Myths
This final section will debunk some of the most popular myths surrounding our credit scores.
Socio-Demographic Status
The most important myth is related to your socio-demographic status. Your employment history, income, religion, ethnicity, sexual orientation, sex, and marital status do not affect your credit score. You can work the same job for over 20 years or be the CEO of a multi-billion dollar company with the same credit score. The most surprising factor in the list above might be employment history. It can come as a surprise to many that it doesn’t affect your credit score. This allows everyone to obtain a loan for their projects. However, the amount loaned and the interest rates will differ. Financial institutions know who their High-Value Clients are and don’t want to lose them. Their rates will be very competitive.
Credit Inquiries
When I worked in the banking industry, one of the most common myths I heard was that inquiring about your credit score lowers it. That is false. You can inquire about it as often as you like. However, as I mentioned, it is important to always inquire with the same credit institution.
Joint Credit Reports
This myth is for current or future lovebirds. You do not have a joint credit score. Each of your debts appears in your credit score. If you have debt with your spouse, it will appear on both credit scores, so make sure it is always paid on time.
Final Thoughts: What Is a Credit Score?
To conclude, maintaining an excellent credit score isn’t as difficult as it seems. Consistency and discipline are essential as soon as you’re old enough to have a credit card. Did you know that over a third of the U.S. has a credit score above 750?
Why can’t you? Your credit score does not affect your margin rate or borrowed amount for present and future margin traders since your cash and securities are collateral.
Frequently Asked Questions
What Is a Credit Score in Simple Terms?
This lets lenders know that you pay your bills on time. The higher the number, the more reliable you are in their eyes.
What Credit Score Does an 18 Year Old Start With?
You don’t start with an assigned number. However, you typically start with a fair or good rating, and then how you pay determines what it becomes.
How Rare Is a 700 Credit Score?
700 isn’t a rare number. The average score is over 700 in the US.
What’s a Good Credit Score?
A good score on your credit report is between 670 to 739. Over 740 is very good. Under 670 is fair.
Is a 900 Credit Score Possible?
The highest you can go is 850, so a score of 900 is impossible.