Understanding Your Credit Score: How Does this Junk Work Anyway?

Alright y'all, ready for some boring adult talk? No? Too bad, it’s important! On the real though, even though nobody really likes credit scores, we have to adhere to some unavoidable societal norms and everything and this is one of those very unavoidable ones. Understanding your credit score is by no means the easiest endeavour, but once you have a good handle on it, your financial life will be a lot easier. Today in the Cleo blog, we’ll break down how these scores work, what they’re used for, how they’re calculated, and how you can raise them. You ready to get this over with? Top off that coffee and let's do it to it.


Who Cares About My Credit Score Anyway?

Banks, apartment complexes, car loan companies, credit card companies….need we go on? Unfortunately, quite a few crucial institutions care quite a bit about your credit score. If you want to buy a house, buy a car, take out a new credit card, etc, you’ll need to have a credit score that meets the standards of the lender. Generally, the higher your score is, the more a lender will trust you as a borrower. Obviously, credit scores aren’t perfect and don’t tell the whole story, but since most lenders won’t know you personally, this is the best way they can gauge your level of financial responsibility and whether or not you’re a worthy borrower. So now that we know what a credit score gets used for, what’s a good credit score?

What’s a Good Score and Is My Score Good Enough?

Credit scores are measured on a scale of 300-850. Don’t ask us why...it’s just, yeah 300-850. These numbers are as good as any we suppose. Anyway, 300 is the lowest, this is where you definitely don’t want to be. 850 is basically considered perfect and makes you a super borrower in the eyes of just about any lender.

But you don’t have to be perfect. Here’s a quick breakdown on how different ranges of credit scores are viewed by most institutions:

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

Now keep in mind, this is just the industry standard way of viewing credit scores. It’s up to the lender what they consider an acceptable level. Of course, lenders will also use these scores to determine terms. Someone with an Excellent credit score might be able to get a loan from the same lender who gives a loan to someone with a Fair credit score. So what’s the difference? To the lender, it’s all about the amount of risk. The person with the Excellent score will seem like a safe bet to them, someone who will pay on time, every time. This means they’ll be willing to lend more at a lower interest rate. The person with the lower score will probably not have access to the same size loan and their interest rate will be inevitably higher. This might not always seem fair, but it’s as Bruce Hornsby and 2Pac say, Just the Way It Is. So we know what makes a good score and how they’re used, but how are they calculated? Let’s talk about it.

How is My Score Calculated?

Great question! There are a variety of factors that determine your credit score. They are, in order of importance:

  • Payment history
  • Total amount owed
  • Length of credit history
  • Types of credit
  • New credit

Let’s break down how each of these work:

Payment History

This one makes up a whopping 35% of your credit score calculation. Payment history is exactly how it sounds, do you make your payments on time? If you miss a payment by a couple days, it’s usually not a big deal so don’t freak out. Typically, missed and late payments aren’t reported until 30 days after the due date. That being said, waiting until that 30 days is DEFINITELY not a good idea. Just go ahead and pay that shit off ASAP. Also, once a late payment is reported, it’s pretty much impossible to get rid of it. To offset its effects on your score, you’ll have to gradually make consistent on-time payments to even out the average. In short, paying your bills on time will ensure your credit score doesn’t plummet.

Total Amount Owed

Your total amount owed, or utilization ratio, makes up about 30% of your credit score calculation. This one isn’t too hard to understand, though it’s a little more nuanced than payment history. Simply put, the closer you are to your combined credit limit, the worse your score might be. For instance, let’s say you have 3 credit cards open, with a total credit line of $10,000. If you have $1,000 total on all your credit cards, you’re only using 10% of your credit limit. This looks good on your credit score. If you’re using $9,000 of your credit line, you’re at 90%, which is decidedly...quite a bit worse. The lower that percent is, the lower your credit score. Easy, right? Right!

Length of History

This one isn’t too bad, as it only makes up 15% of your calculation. That said, it kind of sucks for people just starting their credit history, like college students or recent grads. Since you don’t have hardly any credit history, your score won’t be optimum since you haven’t “proven” yourself yet, so to speak. Once you’ve had credit accounts opened for a certain length of time, your average of all your accounts will determine your length of history. This one you can’t really do anything about. You just have to have your accounts open for a certain period of time and eventually your score will improve because of it.

New Credit and Types of Credit Used

Ok, so we know we listed them in order of importance, but these two are tied, so they’re getting lumped together. New credit and types of credit used both make up 10% of your credit score calculation each. New credit is pretty self-explanatory, it’s just how many new accounts you open and how often. If you open a bunch of new accounts at once, it docks your score so just, ya know, don’t do that! Types of credit used just look at your credit mix. Meaning if you have different kinds of credit, like a credit card, a car loan, and a mortgage, then it’s good for your score. Provided that you pay all of these on time. Lenders like to see that you’re able to handle a variety of different kinds of credit.

Super Boring, but Got It. Now What Happens if My Credit Score Already Kind of Sucks…

Having a bad credit score isn’t a financial death sentence, though it can be a pain to raise it. We’d like to tell you there’s a magic fix, but unfortunately it doesn’t quite work that way. Raising your credit score can take some time and effort. The best thing you can do is just follow good practices. This means:

  • Pay your Bills on Time...Every Time: As we mentioned, payment history is by far the most important factor in your calculation. By always paying on time, you can gradually raise this part in your favor.
  • Don’t Open up a Bunch of New Accounts: You might be tempted to raise your credit line in the credit utilization equation by opening a bunch of new accounts. Not a good idea. This will just dock you for opening a bunch of new accounts for no reason.
  • Ask for Higher Credit Limits on Your Current Accounts: The new accounts thing doesn’t really work, but what about your current accounts? If you’ve done a good job making payments on time, your current credit card accounts might be willing to raise your credit limit. This automatically reduces your credit utilization and can help boost your score.
  • Pay Down Debt: Much easier said than done but if you really want to lower that credit utilization, the best thing you can do is lower your debt. This will show that you’re responsible with your credit lines, rather than pushing them to the limit.
  • Become an Authorized User: This one is a little sneaky and requires having a very nice family member or a very very nice friend. If your relative or friend has a fantastic credit score, they can make you an authorized user on one of their older credit card accounts. This automatically gives you a longer credit history and lower credit card utilization (depending on if they pay their card off). This is an especially great move for those just starting their credit history. Also, your friend and family member doesn’t even have to give you access to using the card if they don’t want to.
  • Don’t Close Credit Cards: Even if you don’t use a credit card, it’s not a bad idea to keep the account open if you can afford the annual fees. This card is adding to your overall credit line and also is part of your length of history calculation. Definitely use this to your advantage.
  • Pay Attention to Your Credit Score: Make sure you’re regularly getting reports on your credit score. You can get them for free, so you can regularly check to see if everything looks right. See an account on there that shouldn’t be? Make sure to get that taken care of, it could be negatively affecting your score. Monitoring your credit score is essential when you’re trying to bring it to the next level.

Suffice it to say, boosting your credit score isn’t the most fun way to spend your time, but you definitely won’t regret it. Having a good credit score opens up a lot of doors and opportunities financially.

Look, we’re gonna shoot you straight here. If you have a low credit score, raising it can take months and often even years. But don’t despair, many people have been there. The sooner you start getting a handle on your credit score and fixing it up the better you’ll feel. Also, if we can offer a bit more advice that you didn’t ask for, watch out for scams and such. There’s straight up shitty people out there who will want to take advantage of your situation. There’s even credit score repair companies out there who might seem like a good idea, but in truth they do things you could do yourself while charging you for it, adding on to your financial woes. Often, these companies will just call creditors for you and try to get things removed. This is something that is quite easy for you to do yourself, and don’t be fooled, if a report is accurate, nobody can remove it, even if these companies promise that they can. Instead, just keep doing the best practices we outlined and over time these negative effects will gradually lessen.

Having a low credit score sucks! But it’s not the end of the world.

Let Cleo Help You Out by Helping you with Bills, Budgets, and More

Look, Cleo can’t call lenders and get negative things off your credit report. We wish she could, but hey, nobody’s perfect! That being said, some of the things Cleo does certainly can help you with those best practices we mentioned. If there’s one thing Cleo knows, it’s finances. If you’re having trouble staying on top of your bills, budgeting, and paying down your debt, let Cleo lend you a hand. Who’s Cleo you ask? Just a dope money saving and budgeting app that can be your personal financial assistant, helping you become a financial wizard. Cleo has plenty of features and functions that will help you get your financial health in order.

Still have questions? Find answers below.
Written by

Read more

signing up takes
2 minutes

QR code to download cleo app
Talking to Cleo and seeing a breakdown of your money.