Credit 101

Credit credit score is a numerical representation of your creditworthiness, which lenders use to evaluate your ability to repay borrowed money. It is based on your credit history, including factors such as your payment history, amounts owed, length of credit history, new credit, and types of credit used. 

Typically, credit scores range from 300 to 850, with higher scores indicating better credit health. A higher score can help you qualify for loans and credit cards with favorable terms and lower interest rates, while lower score may make borrowing more difficult or costly. 

There are two types of credit scores:

• FICO Score: Created by the Fair Isaac Corporation, it's the most commonly used credit scoring model for mortgage and some auto financing lenders. 
• Vantage Score: Developed by the three major credit bureaus; Equifax, Experian, and TransUnion, this model is also widely used by credit card companies.

• 300 - 579 = Poor Credit 
• 580 - 669 = Fair Credit 
• 670 - 739 = Good Credit 
• 740 - 799 = Very Good Credit 
• 800 - 850 = Excellent Credit 

A good credit score is essential for financial health and can open doors to better interest rates on loans, housing options, and more. By understanding how credit scores work and actively managing yours, you can achieve better financial outcomes. 

Payment History = 35% - Your payment history or how you pay your bills/accounts; if they are on time or in default factors in 35% of your credit scores and is the largest factor for your scores.

• Challenge the negative and inaccurate items reporting on your credit report with the various reporting agencies, creditors, and/or collectors to get them removed. 
• Target the negative items that are within the last 24 months, as they are the most damaging to your credit scores. 
• Prevent future negative marks through credit repair education and research. 
• Understand the Statute of Limitations (SOL) before you begin to dispute the negative items. 

Amounts Owed/Credit Utilization = 30% - Your total balances versus their credit limits on open revolving accounts or credit cards factors in 30% of your credit scores and is the second largest factor for your scores. 

• Pay down credit card balances to at least 30%. 
• Use debt consolidation loans to shift revolving debt. 
• Make bi-monthly payments to reduce balances faster. 
• Request credit limit increases (soft pull only) after 6 months of having on time payments. 
• Explore side income or more hours at work to help pay down debts. 

Length of Credit History = 15% - The total age of your accounts established factors in 15% of your credit scores. 

• Avoid closing old accounts (especially over 2 years old and older) as they carry age and positive history. 
• Close only recently opened revolving accounts. 
• Prevent creditors from closing accounts due to "inactivity" or lowering your credit limits by using them every 6-12 months or making monthly payments. 

Credit Mix = 10% - The diversity of your account types such as revolving, installment, other, or retail. 

• Assess current credit profile. 
• Add a credit card, retail accounts, or small loans once every so often. 
• Use rebuilding credit products such as Rental Reporter, Fingerhut, Capital One, Experian Boost, or Secured Credit Cards. 

New Credit Acquired = 10% - Control the frequency of new inquiries. 

• Get educated on credit and limit any new credit applications to keep hard inquiries from being reported on your credit, which will lower your scores. 
• No more than 3 hard inquiries per bureau, annually (per year). 
• Challenge unauthorized or fraudulent inquiries with the creditors, not the bureau. 

Monitoring your credit reports is an essential practice for maintaining good credit health and protect yourself against identity theft and fraud. Here's an overview of credit reporting monitoring including its importance, how to do it, and best practices: 

• Identity Theft Detection: Regular monitoring helps you spot unusual activity, such as accounts opened in your name without your knowledge, which could indicate identity theft. 
• Error Identification: Credit reports can contain inaccuracies. Monitoring helps you identify and dispute errors that can negatively affect your credit scores.
• Credit Score Management: By keeping an eye on your credit reports, you can understand the factors affecting your scores, enabling you to take actionable steps to improve it. 
• Loan Readiness: If you plan to apply for a loan or mortgage, monitoring your credit report allows you to address any issues ahead of time, enhancing your application chances. 
• Preventing Financial Distress: Understanding your credit profile helps you manage your finances better and can prevent you from overextending yourself with debts. 

• Late Payments: Late payments can remain on your credit report for up to 7 years from the date of the missed payment. 
• Charge-Offs: These can also stay on your credit report for up to 7 years from the date of the original delinquency that led to the charge-off. 
• Collections: Accounts sent to collections typically remain on your credit report for up to 7 years from the date of the original delinquency. 
• Bankruptcies: Chapter 7 bankruptcy can remain on your credit report for up to 10 years from the date it was filed. Chapter 13 bankruptcy usually stays for 7 years from the filing date. 
• Foreclosures: A foreclosure can stay on your credit report for up to 7 years. 
• Judgments: If you have a judgment against you, it can remain on your credit report for up to 7 years from the date it was filed. 

It is worth noting that while negative entries can affect your credit scores, their impact may lessen over time, especially if you manage other aspects of your credit responsibly.  Additionally, some older items may drop off your report automatically, and you have the right to request that inaccurate information be either corrected or removed. 

• Missed or Late Payments - Payment history is one of the most significant factor affecting your credit score. Missing a payment or paying late can have serious negative impact to your credit scores. Even one late payment can stay on your credit report for up to 7 years. 
• Maxing Out Credit Cards - Using a large portion of your available credit can significantly lower your credit scores. Aim to keep your credit utilization ratio (credit card balances versus their credit limits) below 30%, and ideally, lower than 10% for optimal scoring. 
• Applying for Multiple Credit Accounts at Once - Each credit inquiry made when applying for a new credit account can lower your score. Applying for several accounts within a short period signals to lenders that you may be in distress, which could hurt your creditworthiness. 
• Closing Old Credit Accounts - Closing old or unused credit accounts can reduce your overall credit limit and increase your credit utilization ratio, negatively impacting your score. It also reduces the average length of your credit history, which is a factor in your credit score. 
• Not Checking Your Credit Report Regularly - Failing to review your credit report can lead to missing errors or fraudulent accounts that may hurt your score. It is essential to check your reports for inaccuracies and dispute them promptly. 
• Having a High Number of Hard Inquiries - While a few hard inquiries are okay, having too many within a short timeframe can lower your score because it indicates higher risk. Aim to space out credit applications to minimize the impact. 
• Ignoring Debt Collection Accounts - If you fail to address accounts that have gone to collections or have been charged-off, this will negatively impact your score. Even paid collections can remain on your credit report for up to 7 years, but addressing them can help improve your score over time. 
• Defaulting on Loans - Defaulting on loans or declaring bankruptcy severely impacts your credit score for 7 to 10 years, depending on the bankruptcy you filed, making it difficult to obtain new credit. 
• Using Credit Cards Solely for Essential Purchases - While using credit responsibly is essential, failing to use credit cards at all can negatively impact your score. Lenders want to see that you can manage credit, so make small purchases periodically and pay them off in full. 
• Not Diversifying Credit Types - Having a mix of credit types (credit cards and retail accounts or revolving accounts) and (installment loans or installment accounts) can positively influence your credit score. Relying too much on one type of credit hurt your score if those accounts are managed poorly. 

By avoiding these common pitfalls, you can better protect and improve your credit score. Regularly monitoring your credit behavior and understanding how different actions impact your score is key to maintaining good credit health.