Understanding your credit score
Photo Source: MyFICO
I consistently hear people talking and asking about their credit score, and how to understand it, because the algorithm is tricky, and to the best of my knowledge it’s not published publicly anywhere. The best anyone can do is rely on experts and articles they’ve researched to try and gather information to make a best guess. The chart I’ve featured above is one I have seen on many sites, and seems to be a generally accepted model that is a pretty good estimate. Some of the percentages aren’t within a consumers direct control, but a few are.
- New Credit: Don’t be overzealous in applying for credit. Apply for what you need, when you need it.
- Payment History: The most recent 24 months of payments makes the largest impact, so make every effort to pay on time each month to keep 35% of your score at its highest amount.
- Amounts Owed: If you already have high balances, this is no longer in your control. If not, congratulations, and remember to be conscientious of what you are charging and not paying in full each month. The remainder of this article is for those who need to reign in their amounts owed, and is based on tips to get the amounts you owe down to manageable levels.
When people discuss paying off credit card debt, the most popular method you will often see recommended is the Snowball Method, which is where you payoff one debt, then apply the amount you were paying monthly to the next debt in line until it’s paid off, and you continue the cycle until all debt is paid in full. It gives a sense of accomplishment, and works well for many people. However, sometimes, someone might find them-self in a situation where they want to pay off all of their debt, but they also need to improve their credit score urgently. Yes, paying off debt does help increase the score, but, if you are at or near your limit on the cards you are paying off, the high debt ratio will continue to be an issue on your report until you are reducing the balance of the last account under the snowball method.
I have been researching different theories online and at the library, and I’ve come across some information that may be valuable to many of you. I am sure most everyone has heard of FICO (credit score) and knows that the higher the number the better. Having maxed out cards will ding your credit, many theorists believe that being in the 85-100% bracket is considered maxed out.
I saw these brackets on a few forums, and while they aren’t “official” to any company, they do seem to be a general consensus ratio range of how the debt to credit ratio affects your score.
- <10% <$100
- 10-19% $101-199
- 20-29% $200-299
- 30-49% $300-499
- 50-84% $500-849
- 85-100% $850-$1000
- >100% $1,001+
For example, (the numbers to the right in the $100-$1000 range are my examples) if you have a card with a $1,000 limit, set your first goal of getting the balance under $850 or 85%. Then get all other cards under 85%. Next, set the goal to get all cards under 50%, and so on. Once they are all under the 50% range, you could then possibly consider going with the Snowball Method to pay them off, but again, it’s a personal choice. I would highly recommend setting a budget before you begin any steps, so you can allocate as much as possible to paying down your debt, and even when your amount due falls well below the amount you have budgeted, PAY THE BUDGETED AMOUNT, not the minimum due. Remember, this category makes up 30% of your score, so it makes a large impact. Getting this under control is a third of the battle! Once the balances are in a reasonable range and you are paying on time, you have now taken control of approximately 65% of your score.
In trying to write articles to help people better understand their credit score, one site I use as a reference is myFICO.
Also, make sure you are checking your credit report regularly. I recommend getting one report every 4 months via AnnualCreditReport.com (the ONLY truly FREE site). For example, order Equifax in January, Transunion in May, and Experian in September. This will ensure you are able to check for errors on a regular basis, and you will be knowledgable about EXACTLY what is on your report and perhaps needs to be fixed.
You can also check your score for free using Credit Karma or Credit Sesame. These sites do NOT require a credit card to sign up. They give score, and very limited information on your credit, along with some suggestions on improving your score. I suggest using them in conjunction with the free annual report to get a solid picture on where you stand.
***The links in this post are NOT sponsored or endorsed, this is just information I gathered on my own for informational purposes. I am NOT a financial expert, just someone trying to help others learn and make better financial choices. The Credit Sesame link IS an affiliate link, but the amount it pays is negligible, and is included because it’s a source that may be of value to you.
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24 Responses to “Understanding your credit score”
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What confused me is that it is not free.
If you use the site, AnnualCreditReport.com (the ONLY truly FREE site), it should be free. The one freecreditreport.com that you see on TV is the one that has “catches” :/
It’s all greek to me!
i dont understand any of it lol
I’m not confused about credit scoring. Thank you.
I don’t even look at my credit score, because it’s sad. What confuses me the most is how I even got in this situation!!
It should be free to everyone. why they use your credit score for so many reasons.
I don’t understand why there are so many companies that you can use to check your credit. Is there some kind of competition as to who keeps the best tabs on everyone?
I don’t even want to know my credit score. All I want to know is why more companies dont offer people second chances.
The pie chart helped make it simple and understandable.
I’m a fraid to look. My husband’s company went bankrupt and we lost our home to foreclosure in 2005. How long will it take for our credit score to recover?
I can’t understand why closing out a credit card negatively affects credit scores. I know about available credit – credit used ratio, but there are reasons for closing credit cards and you should not be penalized for doing so.
I really don’t understand if you keep a no balance on your credit card how this could hurt you.
I’ve heard that myFICO is a good site, thanks for the info.
it confuses me how the score goes up and down!
It all goes over my head. But I have a friend who is a loan officer who can always explain.
The credit score doesn’t make much sense to me at all. What really perplexes me if how the score drops when a creditor pulls your reports. Why!!??
What does it do to your credit score if you have no credit cards, no loans, paid off mortgage?
What confuses me is how a person that doesn’t carry debt and has assets and money in the bank can be considered a credit risk.
I have NO credit… no questioning here lol I buy everything with cash.
The only thing that confuses me about my credit score is why there is more than one calculation. I appreciate that there is more than one company so that there isn’t a true monopoly, but because of that not everyone is on an even playing field as far as the info provided consistently to the three companies or how the number is calculated by each.
I know that your income affects your credit score, but I don’t see where it fits in in the pie chart.
I have always had better credit than my husband, and I will have to look into bettering that.
Really liked what you had to say in your post, Understanding your credit score : Debt Zapper, thanks for the good read!
— Crystal