We all have a friend that we're hesitant to lend things to, no matter what it may be. We may love them like frat boys love Vineyard Vines, but we know once we let them borrow something, we might as well kiss it goodbye. I've even had friends borrow something for so long that I had to borrow it back as if it wasn't mine. Ain't that something?
Lenders, however, don't have the luxury of knowing their customers on a personal level, so they rely on your credit report to determine your likelihood of paying back what you borrowed (and on time). Good credit—like your Summer beach body—takes a while to develop but very little time to lose.
If you don't believe that your credit score matters, you're either too rich to be reading this article, or you're as foolish as someone who turns on BET and expects Baby Boy not to be playing.
Checking Your Score
Before we dive deeper into credit, I highly recommend that you check your latest credit report for free here. You can get a free report from each of the three credit bureaus once every 12 months. It's worth noting that your credit report and credit score are not the same things. Your 3-digit credit score is calculated by what's on your credit report, and each credit bureau scores it differently.
Your actual credit report should be the same between the credit bureaus, but it's not guaranteed as some companies may report to one or two of the credit bureaus and not all three. That's why it's important to view your credit report from each credit bureau and not just one.
Credit Score Range
The important score to focus on, though, is your FICO score, as it's the most widely used. Credit scores range from 300–850 and can be grouped as the following:
300–579: Terrible. I'd rather walk through a Ku Klux Klan meeting wearing a Black Lives Matter shirt than loan somebody in this range some money.
580–669: Ehh-ish. At this rate, you'll get approved for most loans, but your interest rates will be higher than Cheech and Chong.
670–739: Good. This range is like drinking PBR or smoking mid: it'll get the job done out of necessity, but you should want better for yourself.
740–799: Very good. This is the range when you can really begin to start flourishing. You'll have access to the majority of credit cards, and your interest rates will be lower than most.
800–850: Excellent. Once you're in this range, you can start walking around with your chest poking out. Your score is better than the vast majority of people.
It should be noted that there are no universally defined ranges. Different lenders have different definitions of what they consider a "good" score. Lenders looking to approve more borrowers tend to lower their standards for what they consider to be a good score. Funny how that works, right?
Benefits of Having Good Credit
Lower interest rates: Your interest rate is essentially the cost you pay for borrowing money. The better your credit score, the lower your interest rates. It's pretty straightforward.
Better credit cards: Credit cards are essential to establishing good credit; there's no doubting that. But once you meet that goal, a good credit score will give you access to credit cards that'll make spending worthwhile. You'll get access to cards with higher spending limits, rewards, and even cash back on purchases.
Avoid security deposits: It's becoming common for companies to require folks with little or no credit to pay a security deposit in case they're not able to pay their bill. We all know folks love to go missing and "lay low and build" when they owe you money. A good credit score can eliminate this security deposit and save you hundreds of dollars.
Calculating a Credit Score
Five factors determine your credit score. They're listed below in the order of importance:
Payment history (35%)
Needless to say, your payment history is the most critical aspect of your credit report. A history of late or missed payments is a red flag. If you run off on the plug once, you'll do it twice. History has a habit of repeating itself.
Credit utilization (30%)
Your credit utilization is the percentage of your available credit that you're currently using. For example, if you have a credit card with a $1,000 spending limit and spend $200, your credit utilization is 20%. When you're finessin', you want to keep this number below 30% to help your credit.
If you're like everybody who you've ever met and it's hard for you to stop spending, ask for a credit limit increase on your card(s). This usually isn't the best option (mainly because folks end up spending more), but it works if you're disciplined. Godspeed. If your limit is $1,000 and you usually spend $500 every month, a credit limit increase to $2,000 would take your credit utilization from 50% to 25%.
Length of credit history (15%)
Just as jobs prefer folks with experience, lenders prefer folks who have a history of dealing with credit.
Credit mix (10%)
Having different types of credit—like credit cards, car payments, utility bills, etc.—is seen as a positive sign. It shows that you can multitask.
Recent Inquiries (10%)
When you apply for a lot of different credit lines within a short period, lenders see this as a red flag. Three to five inquiries within two years is average. The less, the better.
The Final Word
Credit, of course, is a semi-complex topic, and to cover everything surrounding it would take longer than you'd be interested in reading in one post. I'm not judging you; I hate reading too, fam. As stated earlier, credit cards are a vital component to raising your credit score, and if you're serious about getting your credit together, you're going to need to know the ins and outs of how they work.