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Learning how your credit score works is one of the most important things you can do to safeguard your financial future. It’s how companies determine if you’re trustworthy enough to offer credit on goods and services, so it’s calculated based on factors like how long you’ve used credit and your track record of paying your bills on time.
The Consequences of Having a Poor Credit Score
Having a poor credit score is one of the worst things you can do financially since it will have a significant impact on your quality of life. From minor things like being able to pick up a car rental at the airport to being able to purchase a home, having a poor credit score will negatively affect you in many ways.
The two major companies that calculate credit scores in the U.S., VantageScore and FICO, don’t share the exact formulas they use to compile scores. However, there are some basic ingredients that both companies use. Understanding what these factors are helps you to plan appropriately so you can protect or build your credit score.
Your credit score impacts many aspects of your life like your ability to get loans, what type of rental properties you qualify for, and the interest rates you pay on loans.
FICO and VantageScore both agree that your payment history and credit utilization make up at least half of your credit score. Let’s take a look at these two things in greater detail:
1. Payment History
Your credit report reveals how consistently you pay your credit bills and other obligations on time. Your payment history accounts for up to 35% of your score according to FICO, while VantageScore says it counts for about 40% of your score.
Paying all your credit bills on time is the quickest way to improve your credit score. Any missed payment should be addressed as soon as possible since it does more damage to your credit score the longer it takes for you to catch up.
2. Credit Utilization
A person’s credit utilization refers to how much of their credit limit they’ve used up. FICO says it counts for 30% of your credit score, while VantageScore puts it at 20%. Credit experts recommend using no more than 30% of your credit limit to keep your utilization low. High credit utilization is easy to fix since the damage it causes disappears once you pay down your balance and the creditor reports it.
Some of the other things FICO and VantageScore evaluate to determine your credit score include:
- How long you’ve used credit
- How long it’s been since you applied for credit
- The type of credit you have
- Your total debt
We Can Help Rebuild your Credit
Poor credit significantly impacts your quality of life and makes it harder to reach your life goals like owning a home. Our credit repair professionals can provide you with the guidance you need to put bad credit behind you. Call or visit our office for a consultation with one of our specialists.