Now that you’ve committed to getting serious about personal finance, there’s another aspect of
financial literacy you’ll want to make sure you understand—your credit score. After all, your
credit score impacts your ability to obtain loans or credit cards at the lowest possible rate. Your
credit score plays a key role in determining the interest rates you receive from lenders.
Credit Scores 101
At its most basic, a credit score is a three-digit number, generally between 300 and 850, that
reflects your credit health and predicts your creditworthiness. Your credit score is based on your
credit report, compiled by one or several of three credit bureaus: Equifax, Experian, or
TransUnion. Your credit report includes personal finance information such as your payment
history, outstanding balances, and the length of your credit history.
Credit scores are calculated using a formula that evaluates several key aspects of a person’s credit
history. The most widely used scoring model, the FICO score, considers five main factors:
- Payment history (35%), which looks at whether you pay your bills on time
- Amounts owed (30%), which assesses how much debt you carry relative to your available credit
- Length of credit history (15%), which measures how long your credit accounts have been active
- Credit mix (10%), which looks at the variety of credit types you use, like credit cards and loans
- New credit (10%), which includes recent credit inquiries and newly opened accounts.
A higher credit score is preferable and can help you obtain lower interest rates, but when
considering your financial goals, keep in mind that there may be different scores for different
types of loans. The FICO 5, for example, is primarily used for mortgages, while the FICO 8 is
mainly used by credit card companies.
Debt-to-Income Ratios
An important factor in determining your loan approval from a lender is your debt-to-income ratio
(DTI). Your DTI is expressed as a percentage that calculates how much of your gross monthly
income you spend on debt payments, such as mortgages, credit cards, and student loans.
While your DTI may not be directly factored into credit scoring models, debt payments will
appear on your credit reports, which are ultimately used to calculate your credit score.
Generally, personal finance experts recommend that you maintain a DTI of 35% or less, which
indicates to creditors that your debt is at a manageable level and, ultimately, will help you
achieve your financial goals.
How to Increase Your Credit Score
The good news is, there are ways to increase your credit score—starting today. The quickest
way to improve your credit score is by paying down any outstanding debt. It can increase your
credit score in as little as a few weeks. To help pay down debt faster, you may want to consider
refinancing your loans to get better interest rates. This can lead to more manageable monthly
payments. Other financial changes like paying bills on time and correcting any errors on your
credit report can also help raise your credit score.
Getting Started
At Gravity Lending, we can help you navigate debt and credit score complexities to access the
most affordable interest rates so you can access the most affordable interest rates and terms for auto
refinance. To get started on your path to personal finance empowerment, contact us today!