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Credit Scores 101: Everything You Should Know

Listen to Best in Wealth Podcast Episode 144

This episode of the Best in Wealth podcast is a crash course: Credit Scores 101. I answer some of the questions you may have: What is a FICO score? Why do you want a good credit score? How do you improve your credit score? When should you consider closing a credit card? I break your credit score down to help you understand how it works for you and why it is important. If your credit score has you confused, do not miss this informative episode. 

Outline of This Episode

  • [1:53] My wife’s credit score is always...
  • [5:50] How your credit score is determined?
  • [9:15] the NEW standard that just came out
  • [10:23] Why do I want a good credit score?
  • [13:34] How do you build your credit score?
  • [18:48] When should you CLOSE a credit card?

Credit Score 101: What IS a credit score and HOW is it determined? 

 When someone is talking about a credit score, they are typically referring to a FICO credit score. FICO stands for “Fair, Isaac, and Company”. It is the oldest and most well-known of the credit reporting agencies. A FICO score can range from 300 to 850—a higher score is better. Your credit score is based on your credit history. Its purpose is to help lenders estimate how likely you are to repay the money that you borrow. 

 How are the scores rated?

  • Poor = 579 or lower
  • Fair = 580–669
  • Good = 670–739
  • Very Good = 740–799
  • Exceptional = 800–850

 Now that you know what a FICO credit score is, and what the ranges are—how do they calculate your score? It is based on these things:

  • Credit Card Payment History: This accounts for 35% of your credit score.
  • Credit Utilization: Your credit card limit and how much you are using accounts for 30% of your score. You want to use under 30% of your credit limit at all times or it will negatively impact your score. 
  • Age of Credit History: How long your credit accounts have been open accounts for 15%.
  • Credit Account Types: This accounts for 10%. 
  • Hard Inquiries: When a bank, car insurance, employer, etc. check your credit score, it impacts your credit and counts as much as 10% towards your score (NOTE: Checking your OWN credit score does not make an impact). 

 A NEW standard was just announced that will shift these percentages. Listen to find out what those changes are!

Why you should strive for a good credit score?

 There are 6 reasons why you want a good credit score:

  1. A better credit score typically equates to a better interest rate on loans when you go take out a loan. It can be a difference of thousands of dollars.
  2. Insurance companies use your credit score to calculate your rates. The difference between a poor score and a high score can impact your rates as much as 67%.
  3. Your credit score is checked and impacts whether or not you can rent an apartment or home. 
  4. A high credit score can get you a security deposit waiver on utilities when you purchase a new home. 
  5. If you are buying a new phone and have a poor credit score, a carrier may require a deposit.
  6. Prospective employers may look at your credit score to determine whether or not they will hire you. 

Build a better credit score

 We have established WHY you want a good credit score. So what do you do if you have a poor score? Can you build it up? The simple answer is yes—you CAN rebuild your credit score. Here is a few ways you can increase your credit score:

  • Do not be late paying your bills—EVER—it will have a long, far-reaching impact.
  • Avoid maxing out your lines of credit—keep it under 30%. 
  • If you cannot keep your running credit under 30%, consider increasing your limits.
  • Patience is key: the longer you have credit history, the better your score will be.

The THREE instances you should close a credit card

Closing lines of credit typically negatively impact your credit score. You will see an initial drop followed by a slight raise when credit checks realize you have closed a card. But it likely will not get back to where it was.

So why would you want to close a credit account? There are 3 reasons when you would want to consider closing a credit card:

  1. If you have a high fee on a card you never use. You can close the card, or see if you can switch to a different card with a lower fee. 
  2. If you are worried about identity theft and want to lower the odds of your identity being stolen, it is advantageous to have fewer credit cards open. 
  3. Close your credit card accounts out to regain control of your finances. If you have maxed out credit cards, cannot control your spending, or want to get in control of your debt, this is important. 

Listen to the whole episode to find out what you can do if you decide to close out your credit cards, or have no credit history whatsoever. There are still options out there. 

Resources & People Mentioned

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.