Everything You Need to Know About Credit Scores

December 09, 2021

Your credit score can be the difference between achieving your financial goals or not. A good score can help you buy a home, start a business, purchase a new car, and more. A bad score can make it nearly impossible to realize those dreams.

It’s amazing how much this three-digit number can impact our lives. That’s why we’ve put together this quick guide. It contains the information you need to understand credit scores so you can build your credit and achieve your financial goals.

What is a Credit Score?

A credit score is a number used by lenders to estimate how likely you are to pay back a loan or debt. Credit scores are calculated using information on your credit accounts provided by credit-reporting agencies, or bureaus. The three largest credit bureaus are Equifax, Experian, and TransUnion.

How Credit Scores are Calculated

Each credit bureau uses their own model for calculating credit scores. However, there are five main data points they all put into their algorithms to calculate your credit score. These are:

  1. Payment History: Payment history accounts for 35% of your credit score which is why it’s extremely important to pay your bills on time. Just one missed payment can negatively impact your credit score and remain on your credit report for 7 years.
  2. Amount of Debt Owed: This is the total amount of money you owe to lenders compared to the amount of available credit you have on your accounts. The amount of debt you owe accounts for 30% of your credit score. Experts recommend keeping the amount of debt owed below 30% of your total available credit. For example, let’s say you have $5,000 in total available credit. You should aim to owe no more than $1,500 to lenders at any given time.
  3. Length of Credit History: Credit history is the amount of time you’ve had credit. It’s calculated by averaging the length of time you’ve had all your credit accounts. The longer your credit history is, the better, because it accounts for 10% of your credit score.
  4. Credit Mix: Credit mix refers to the variety in the type of debts you owe. This includes all loans and credit cards. Credit mix accounts for 10% of your credit score and lenders like to see a good variety of accounts. Why? It demonstrates you’re able to pay off a variety of debts.
  5. New Credit: Since credit history plays such a big role in your credit score, it’s no surprise that too many new credit lines in a short period of time can negatively impact your score. Lenders don’t like to see too many “new inquiries” or requests for credit accounts in a short period of time. New credit accounts for 10% of your credit score so try not to open new accounts close together.

Credit Score Ranges

There are dozens of types of credit reports, and each has their own range of what’s considered good or bad. Additionally, each creditor has their own standard of what they consider a good credit score. However, FICO is the most used credit scoring report by lenders. Below are the credit score ranges used by FICO.

  • Exceptional: 800 and above
  • Very good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 and lower

How to Get Your Credit Report

Per the Federal Trade Commission, you are entitled to one free credit report from each of the three nationwide reporting companies every 12 months. As noted above, these companies are Equifax, Experian, and TransUnion.

Be mindful when you request your free annual credit reports. There is only one FTC authorized website to order your free reports. It is annualcreditreport.com. You can also call 1-877-322-8228 to request your free reports.

How PadSplit Helps Improve Your Credit Score

At PadSplit, we know improving credit scores takes time and is hard when you’re on a budget. That’s why we included rent reporting in our Member Perks. We’ve partnered with Esusu to help our Members raise their credit scores — free to Members. Esusu is a company that reports rent payments to credit bureaus. This partnership helps our Members build credit while they work towards achieving their financial goals. Thanks to our partnership, 95% of our Members have seen an increase in their credit score. In fact, more than 2,700 PadSplit Members established a credit score for the very first time.

It’s just one of the many ways we’re working to close the housing continuum and wealth gaps. Want to improve your credit and save money at the same time? Become a PadSplit Member today.

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