Credit & Debt

Components of a Credit Score

You need established credit in order to buy a home or a new car. Credit is how you prove your trustworthiness to lenders, so it is never too early to start taking action on building your credit. That trustworthiness is measured by a credit score, which can range between 300 and 850. Your credit score is made up of five categories:

  1. Payment History – 35% 
    Paying your accounts on time is the most important component of your credit score.
  2. Amounts Owed – 30%
    Just because you have a high credit limit, does not mean that you should max out your borrowing. Your debt-to-credit ratio looks at your available credit, and how much debt you are carrying. In fact, it’s a good idea to stay well below a 30% debt-to-credit ratio so your credit score doesn’t take a hit.
  3. Length of Credit History – 15%
    A longer credit history will increase your credit score.
  4. Credit Mix – 10%
    Diversify your credit, it will have a positive impact on your overall credit score. Examples are: student loans, credit cards, retail accounts, car loans, and mortgage loans.
  5. New Credit – 10%
    Opening several accounts in a short period of time represents greater risk, especially if you do not have a long credit history.

* Certain actions such as late payments, student loan default, and a high debt-to-credit ratio will negatively impact your ability to open new lines of credit.

Credit Score Scale

Excellent (800 – 850): Easy approval process when applying for new credit, you will be offered the best interest rates. If you are in this range, you have demonstrated a long credit history of no late payments. You have a stable employment history, and various types of credit.

Very Good (750 – 799): If your score is in this range, you may qualify for better interest rates from lenders.

Good (700 – 749): For the most part, a “good” credit score is going to get you approved. You will be eligible for most loans, but will not be offered the best interest rates.

Fair (650 – 699): If you fall in this category, you are either working to rebuild your credit after some tough times, or you are doing well and have recently run into some trouble. You may be asked for down payments for some types of credit. Expect higher fees and interest rates.

Poor (600 – 649): Poor payment history, collection accounts, bankruptcy filings, or out of control credit card debt may put you in this category. You will most likely need a cosigner for any loans, and mortgage loans will unlikely be an option.

Very Bad (300 – 599): Only specialized lenders will lend to you, and your interest rate will be very high. If you fall in this category, you will have a hard time getting insurance and employers who check credit reports will not consider you.

Credit Management:

Master Your Plastic Lesson: Click here to start the lesson.

Credit Reports

Protect yourself and your finances against identity theft. Below are some basic steps you can take. The Federal Trade Commission provides helpful tips for keeping your personal information secure.

Check your Credit Regularly

You have access to one free credit report each year from each of the three consumer credit reporting bureaus. You’ll want to monitor your credit report to ensure that no activity occurs on you account that you didn’t initiate. AnnualCreditReport.com is the official site for individuals wanting to obtain their free annual credit report. Warning: “freecreditreport” is not free.

Tip: Set an appointment on your calendar at four month intervals to retrieve a credit report from the three credit reporting bureaus. This is the best way to track your credit history and know that your identity is safe.

3 Consumer Credit Reporting Bureaus:

Protect Your Personal Information

Identity thieves can use your personal identifying information to open accounts, apply for loans, apply for jobs, or commit crimes. Carefully guard your social security number, date of birth, address, bank account numbers, and your student ID number. Shred mail that contains any of these. Be conscious of where you are when you give your social security number over the phone. If others can overhear you, they can steal your information! It is also a good idea to review the personal information that you’ve included on your social media accounts.

Tip: Be careful of entering your information online – only do so if you trust the site (look for the “https“). The “s” means “secure”.

Opening a New Line of Credit – Questions to Consider

If you are thinking about applying for a credit card, make sure you understand the terms and conditions. Consult with a parent or someone you trust when you’re making the decision.

  • What is the interest rate?
  • Is there a promotional rate?
  • What will the rate become after the promotion ends?
  • Is the rate fixed or variable?
  • Is there and annual fee for the card?
  • What kinds of perks do you get? (Examples might include airline miles or cash back on certain purchases.)
  • Remember: if you plan for purchases and save money rather than buy on credit, you pay ZERO interest!

Understanding Interest

Fixed Vs. Variable Interest

Interest rates can be “fixed” or “variable.” A fixed rate remains the same for the entire lifetime of your loan. Variable rates can shift (typically annually) based on market factors.

Simple Vs. Compound Interest

Some accounts pay simple interest, which only accumulates on the principal balance you deposited—not on any accrued interest that has previously capitalized. You’ll still earn money with simple interest, but it will take longer to earn the same amount as you would with compound interest.

Enjoy this fun infographic from SALT to learn more!