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There’s a misconception about financial literacy month. Many think this month is about (finally) learning those complex investing terms or paying off all your debt.
Really, it’s about mastering the basics so we can all experience a better financial future.
And trust me when I say there is no financial concept more basic than knowing your credit score. And I’m not talking pumpkin spice and Ugg boots basic. I’m talking bare minimum basic.
As in, you’ll need to know these terms if you ever hope to better your financial outlook. (Like knowing your ABCs if you want to learn to read.)
So here’s what you absolutely need to know (and how to easily get the information if you don’t.)
Your current credit score
Knowing your credit score is helpful for a number of reasons: it can let you know if you have good enough credit to finance a major purchase, and it can also let you know your credit health at-a-glance.
Most importantly, if you’d like to improve your credit, you have to know the baseline first before you can put a credit improvement plan into action.
How to find out your current credit score:
You can get your score for free on a variety of websites such as:
- Credit Karma
- Credit Sesame
Many credit card companies now offer free FICO scores as a perk to card members.
You can also order a hard copy from each of the three credit bureaus (Transunion®, Experian®, and Equifax®.) You can get a free hard copy mailed to you at least once each year via AnnualCreditReport.com.
The numbers behind the breakdown of your credit score
When it comes to the numbers that make up your total FICO score, remember this:
35 – 30 – 25
35% – Payments
On time payments are the largest portion of your credit score so be sure to keep your accounts in good standing.
30% – Debt
This is how much you own in relation to your income (more on that later!)
25% – Credit
This isn’t a full number, but rather a mix of the remaining (smaller percentage) factors
- 15% – Length of credit history
- 10% – New lines of credit
- 10% – Credit mix
In order to ace this category be sure to keep your longest credit accounts open, limit new inquiries, and make sure to have a nice ratio of good debt vs. bad debt. See more information on the makeup of your credit in this article from The Muse.
Your Debt to Income Ratio
One of the biggest indicators of credit health is how much debt you’re carrying compared to your overall income. This is widely known as your debt to income ratio.
Having a high debt-to-income ratio can impact your credit. Conversely, not having enough credit history can also impact your score.
How to find your debt-to-income ratio:
You can do a quick calculation of your debt-to-income by adding up all your monthly debts (the credit card payments, student loan payments, car payments, mortgage etc.), then dividing that number by your monthly income (take home pay BEFORE taxes).
Convert to a percentage and you have your DTI. When checking your credit, lenders typically look for a DTI of less than 35%.
Your Target Credit Score
You might think, well if (x) is the highest credit score you can get, then that should be the target, right?
Well, yes. When it comes to credit, the higher the better.
But if you’ve got a lower score, shooting for the top is like trying to run an Iron Man before you’ve even done a 5k.
How to find your target credit score:
Ask yourself, “what is the goal?” If it’s to qualify for a better interest rate on a home loan, for example, you may want to raise your 600 score (which the FICO model grades as a “fair” score, to 675 (a “good” score.)
Then assess ways to raise your score by 75 points. Things to try might include:
- Working with a professional credit repair agency
- Remove any errors
- Pay down debt
- Automate payments so they are always on time
- Ask for credit line increases with current card companies
It can be long, hard work to improve your credit, but the rewards are well worth the effort. At today’s interest rates, a 75 point score increase would save $43,564 in interest over the life of mortgage.
See? Financial literacy can make you smarter and wealthier.