Credit scores play a significant role in our financial lives. They affect our ability to rent apartments, buy cars, and secure loans. But understanding them can be tricky due to contradictory advice and hidden rules. Tiffany Aliche, known as the Budgetnista, explains how to navigate the credit score system effectively.
Credit Score Basics
Your credit score reflects your financial reliability. The FICO score, used by most lenders, ranges from 300 to 850. A score of 740 or above is typically seen as excellent, meaning you are likely to be approved for credit.
Boosting Your Credit Score
Improving your credit score involves strategic actions. If you lack credit history, becoming an authorized user on someone else’s credit card can help boost your score. Choose someone reliable to ensure positive inheritance.
Aliche emphasizes the importance of being an authorized user on credit cards, recommending not giving physical access to the actual card.
Maintaining low credit card utilization is crucial. Spend only up to 30% of your credit limit, though less is better. Paying your balance before the statement date can also prevent negative reporting.
Full Payments and Credit Utilization
Paying off your credit card in full monthly is beneficial for your credit score. Contrary to some beliefs, keeping a small balance is not advantageous, as credit card companies benefit from fees on unpaid balances.
Credit Limit Increases and Inquiries
Requesting a credit limit increase may result in a ‘hard inquiry,’ impacting your score. Weigh the benefits against the potential score hit. Strong credit increases approval chances.
Credit Score Composition
Your score comprises:
- Payment History (35%): Timely bill payments are vital.
- Amounts Owed (30%): Keep balances below 30% of your limit.
- Length of Credit History (15%): Older accounts strengthen history.
- New Credit (10%): Opening new credit lines can decrease scores.
- Credit Mix (10%): Diverse credit types are favorable.
Non-influencing factors include employment, income, savings, marital status, and dependents.
Building and Managing Credit
Only build credit when confident in managing it responsibly. Aliche suggests maintaining between three and ten credit lines, ideally managing around five.
Accessing Your Credit Score
Find your credit score via online banking portals or major agencies like Experian, TransUnion, and Equifax. Scores may vary across platforms.
Originally published on November 10, 2020, this guide is designed to help you understand and improve your credit score. For more insights, contact NPR or subscribe to their Life Kit newsletter.
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