Credit Score 101

What is a credit score?

The most simple definition of a credit score is calculated number that shows your risk to a lender. The lower the risk you are, the higher your credit score is. This is one of the few areas where a high score is good! Credit scores range from 300 to 850 with 850 being a perfect score. Note this range is for the FICO score and there are a few different credit scores out there. The FICO score is by far the most popular score out there. Other ranges of credit scores can go from 0-850.

Why is a good credit score important?

For many reasons.. With the main reason being, if you ever want to borrow money you want to show the lenders that you are a responsible lender. You might ask, “But Nick, this blog is mainly about credit cards, loyalty programs and travel. Not about loans”. While this is true, a credit card is actually seen as a loan in the lenders eyes. Even if you pay your monthly statement in full, you are still loaning that money from the lender for around a month. This is why it is crucial to have a good credit score, so the lender trust you with credit cards so you in turn can earn those miles and points.

So how is my credit score calculated?

A credit score is a living number and changes constantly. A credit score is comprised of:

  • 35% Payment History – Pay on time always!
  • 30% Utilization – Stay below 10% utilization before your statement closes
  • 15% Length of credit – Keep a few no annual fee cards around
  • 10% Types of Credit – Try and vary credit with credit cards, car loans, mortgages, etc.
  • 10% New Accounts – This one is hard in the credit card game and is hard to avoid

As you can see, if you follow the rules it’s not hard to have a great credit score. Pay on time, utilize a small portion of your credit line and have a long credit history with different forms of credit account and you’ll have 90% of your score. The last 10% will be difficult to have in the credit card rewards game since you’ll be applying for new credit cards regularly.

What is an excellent credit score? Or a good score?

Anything over 750 is seen as an excellent score and you will qualify for the best credit cards (depending on income too unfortunately) and loan rates. Anything between 700-749 is seen as a good credit score and will qualify for good/excellent credit cards and good loan rates. Anything below good, you’ll start having a hard time qualifying for any good credit cards or loans.

Does applying to a bunch of credit cards affect my credit score?

Yes, but minimally. Look back at what makes up a credit score. As long as you pay on time, use below 10% percent of your credit line, have a few long open accounts and a good mix of credit accounts you have 90 percent of your credit score right there. You’ve earned an A at that point. The last 10% is new accounts. This is where your credit score will lack but it doesn’t matter since you already earned that A. If you do good on everything that makes up your credit score except for new accounts, you will easily have a 750 or higher credit score which is deemed excellent and will earn you the best credit cards, loan rates etc.

How to monitor your credit?

I suggest signing up for an account with Credit Karma and Credit Sesame. Both websites offer free credit reports, credit tips and credit monitoring. Credit Sesame even offers members a free $50,000 identity theft insurance.

-Points Tutor