Credit 101
Here are the facts on revolving credit and how it can affect your credit score either positively or negatively.
When was the last time you looked at your credit score? If it’s been a while, it could potentially be lower than you thought. If you’re interested in applying for credit cards or loans, it’s sensible to not only know what your score is, but also understand what makes a credit score “good.”
Here is why a good score matters and why it’s even better to move that score up into the very good or excellent range.
Did you know that there’s more than one credit score used by borrowers and lenders? Not all of them are designed for you to use (or even know about), but the most common ones are pretty well-known. How many of these on the list are you familiar with?
Released by Experian and available to both borrowers and lenders, you’re probably most familiar with the FICO score. It has a range of 300 to 850, and you can view it in a variety of ways. Your credit card statements may include your score, which can help you stay on top of your credit health. Otherwise, you could access this through a credit report or other means.
Created by TransUnion, Equifax, and Experian, this model also uses the 300 to 850 credit score range to tell you how you’re handling your credit. While not as widely used as FICO, it’s an industry-accepted way to share the health of payments, debt loads, and credit mix.
You won’t have access to this score, as it’s used internally by banks and lenders to see how you’re doing with your funds. It’s not always used to judge new applicants. More commonly, lenders may find out your score to pre-qualify you for new loans or lines of credit.
When you hear the phrase “credit score,” you may be thinking of the FICO score, since it’s the commonly-used score today. Created by the Fair Isaac Corporation, it’s used by lenders to make credit decisions, and it’s also shared with consumers to help them monitor the health of their credit over time.
The ranges for the FICO system go from 300 to 850, with the higher credit scores getting you access to better opportunities. Currently, a score of 670 or more is a “good” score, but you should aim even higher to enjoy lower interest rates and the best perks. For instance, a score of 800 or more is referred to as “exceptional” (and was formerly called “excellent” by the credit scoring model).
The FICO is made using the factors we list out later in this article, but each category of credit health accounts for a different amount of the score.
VantageScore is an alternative to FICO, developed by Experian, TransUnion, and Equifax. The score to beat here is similar since it also runs on a 300 to 850 point scale. Anything above 700 is considered a good score, but anything near 800 is the goal to achieve an excellent credit score (and gain access to the best credit offers.)
Even if you don’t plan to open a credit account today, the odds are good you’ll need to someday. From buying a house to getting approved for better insurance rates, many of the things we want during our adult lives require a suitable credit score.
Starting now, by taking a look at your score and monitoring it for any drops, so you so you can keep it healthy for when you do need it. Waiting until you apply for credit is often too late to fix a lackluster score.
The algorithms that create a score may be secret, but the things that go into those algorithms are not. Here are the financial characteristics that determine whether you’ll have a good enough score for your next successful credit application.
Whether you only have a single, brand-new credit card or dozens of accounts well-maintained for years, the longer you have good credit, the better. Older accounts help you achieve a higher score, and FICO considers the length of credit for 15% of your total score.
Do you have a good mix of installment accounts and revolving accounts? Installment loans include car loans, mortgages, and student loans. Revolving accounts are credit lines and credit cards that you can borrow against repeatedly. Having a bit of both is the best for your score. This factor makes up 10% of your total FICO score.
Do you always pay your loans on time? You should! Having an impeccable payment history is crucial to getting the score of your dreams. A FICO score uses this metric as 35% of your total score, so it’s important to pay close attention to it and avoid late payments.
How much do you owe on all of your cards and loans? If it’s a staggering amount, you may want to consider paying some of it off. Likewise, the debt to available ratio (also known as credit utilization ratio) is even more important. Banks want to see that you owe a lower amount than your overall credit limit, because it shows that you’re not looking to max out your cards. If you can keep your credit utilization ratio to under 30%, you’ll be in good shape. This ratio accounts for 30% of your total FICO score.
Checking your own credit score isn’t an issue and won’t hurt your score because it’s known as a “soft” credit check. However, the same doesn’t apply when others check it for the purpose of a credit application. Every time you apply for a card, the bank may need to run a "hard" credit check, which can make your score dip a few points. Hard inquiries account for up to 10% of your FICO score.
Making smart money moves will almost always have a positive impact on your score, but here are some specific ways to watch your credit numbers rise:
Is it possible to not have a score at all? Yes. If you’ve never taken out a loan or applied for a credit card, it’s likely that you don’t even have a score. Fortunately, you can fix this. You would need to apply for credit, which may be difficult to do without an actual credit history, but you can also try:
After you’ve taken part in a reportable credit activity, you’ll start building credit and your score. It may take a few months for it to happen, but it’s better to start now than never at all.
Does everyone need a credit score? Maybe not. While it can be useful for obtaining certain types of credit, there are still avenues to getting the funding you need without it. Petal uses a different model to assess risk, one that uses other information (like your income) to determine your suitability for credit. While it’s still a good idea to take those same responsible steps that would build your credit, having a score isn’t the end-all-be-all it used to be.
If you’re interested in building your credit, we provide our customers with the tools to responsibly track and improve their credit over time. Learn more about how Petal can help today.
Petal Cards are issued by WebBank, Member FDIC.
Here are the facts on revolving credit and how it can affect your credit score either positively or negatively.
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