What You Need To Know About Your Credit Score

Despite taking a number of finance courses in college, once I graduated college I realized that I had no practical knowledge of some of the financial terms that get thrown around in daily conversations. It wasn’t until I was required to get a credit check to secure my first apartment that it occurred to me I didn’t really know a whole lot about my credit score—a score that was going to impact whether I was able to move into an amazing apartment with my friends.

Luckily I had good enough credit to grab that apartment and live in the dining room turned bedroom for the next three years, but I decided to brush up on some of the “basics” so I wouldn’t leave that up to luck again.

Here are some of the basic things you should know about a credit score.

What is a credit score?

Also sometimes called a FICO score, a credit score is a number that represents your credit-worthiness and is calculated from your credit history. Basically, it’s an easy way for a lender (or landlord, employer, etc.) to see quickly if you’ve had a history of being responsible with debt. Your credit score will range from 300-850, with the higher score representing better credit.

How is it calculated?

The exact formula for calculating a credit score is not shared, but the factors that are used to calculate it are:

  • Your payment history: how well you’ve paid off debts in the past (and know that any late payments are counted against you!)
  • Amount owed: how much debt you have outstanding
  • Length of your credit history: how long you’ve been a credit holder
  • New credit: how much new debt have you taken on recently
  • Type of credit: what different types of debt you have (credit card, auto loan, etc.)

What is a credit check?

There are two types of credit checks: hard inquiries and soft inquiries.

A hard inquiry is one you usually have to authorize and is run when you apply for a credit card, a mortgage, or another loan (think car, business, etc.). The important distinction of a hard inquiry is that it may lower your credit score by a few points. Don’t worry – your credit score won’t be impacted by a hard credit check forever, but you do want to avoid doing multiple hard checks in a short amount of time. After some time this hard inquiry will drop off your credit report and not affect the score anymore.

A soft inquiry is usually used when you’re getting a background check, when you’re checking your own credit score, or when you received “pre-approved” offers, like a credit card. Unlike a hard inquiry, a soft inquiry will not affect your credit score.

What is it used for?

A credit score can be used for many different things. When applying to rent a home or an apartment, your credit score is usually a major factor in being approved. When applying for a loan (school, car, or home) or a credit card, your credit score will be a large determinate for whether you qualify.

There are some other instances where your credit score might be checked: When you sign up for utilities or insurance, they may check your credit score. And most surprising for me to learn was that when you’re applying for a job with a background check, they might check your credit report as well. Yikes!

What can I do to increase it?

While there is no magic way to increase your credit score, but there are some things that can help you get on, or stay on, the right track.

The most important thing that will help you stay on the right track is to pay off your credit card balance in full each month. I know in some situations that might not always be possible, but that’s the goal you should strive for.

Beyond that, some other things you can do to make sure your credit stays in tip top shape:

  1. Report any errors: Check your credit report for any late payments and to make sure that the amount you have outstanding is correct. If you find any errors, file a report with the credit bureau to dispute the error. They are required to investigate anything that is reported.
  2. Under use your credit cards: Part of the factor in calculating a credit score is how much available credit you have verses how much you have used (credit utilization). This means you should try to keep the amount of debt you have to a minimum.
  3. Pay your bills twice a month: Not only will this help you focus on prioritizing debt payments, but it will also help with credit utilization. Because debt balances for your credit report can be pulled at any time during the month (not just at your payment due date) keeping the outstanding debt amount low will help boost your score.

Small changes can lead to big improvements, so if you’re not happy with your credit score use some of these tips to get a plan in place—and watch your rating raise.

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