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Understanding Your Credit Score

Whether you are looking to buy a home, rent an apartment, obtain a student loan, open a credit card, finance a vehicle, pick up a cell phone, get internet or cable, obtain insurance coverage, or sometimes even get a job, your credit score will likely play a key role in determining whether or not you are approved for any (or all) of the above.  In the eyes of lenders, landlords, service providers, insurers, and employers, this score is a measure of how responsible and trustworthy a person you are.

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That being said, don't be absent minded when it comes to your credit score.  Understanding and strengthening this key financial measure will make life easier for you as you go forward, and could potentially save you tens of thousands of dollars over the course of your life.  Those with stronger scores will almost always score the better deals and opportunities, and lower interest rates.

Below is an overview of how your credit score works, and how to work to improve it.


The FICO score (shortened from the original company name, the Fair Issac Co.) is the primary score used by anyone checking your credit worthiness.  It is compiled by using information from the 3 major credit reporting agencies: Equifax, Experian and TransUnion.

The scoring scale ranges from 300 at the low end (credit misfits) to 850 at the high end (credit gurus), but credit scores are generally accepted as good or bad in accordance with the chart referenced.  The average credit score in America generally hovers in the 690-695 range, according to research by the folks at ValuePenguin.


Source: myFICO

There are five primary factors that go into the calculation of a credit score.  Knowing each will help you become a credit ninja in route to improving your score.

1. Payment History (35% of score) - This reflects your track record of making on-time payments and has a high impact on your credit score.  This is a direct reflection of how reliable you are to anyone checking your credit.

Excellent = 100%, Good = 99%, Fair = 98%, Poor = 0-97%

2. Amounts Owed (30% of score) - This reflects how much of your available credit you actually use and has a high impact on your credit score.  A higher percentage usage suggests that you might not have your spending under control and could be at risk for default on payments.

Excellent = 0-20%, Good = 21-40%, Fair = 41-60%, Poor = 61-100%

3. Length of Credit History (15% of score) - This reflects the average amount of time your available credit accounts have been open and has a medium impact on your credit score.  Opening a lot of accounts in short time could suggest a higher level of risk to lenders.

Excellent = 9+ years, Good = 6-9 years, Fair = 3-6 years, Poor = 0-3 years

4. New Credit (10% of score) - This reflects the total number of times in the past 2 years that a hard inquiry (where someone has requested a detailed credit report on your behalf) has been placed on you, and has a low impact on your credit score.  A high number of inquiries could raise a red flag to lenders, suggesting that you've either been recently turned down by other lenders, or that you are currently planning to take on a lot of debt.

Excellent = 0-1 inquiries, Good = 2-4 inquiries, Fair = 5-10 inquiries, Poor = 11+ inquiries

5. Credit Mix (10% of score) - This reflects the number of accounts you currently have open, and has a low impact on your credit score.  A higher number of account is a positive as it suggests that many others have found you credit worthy.  However, don't overdo this, as the average age of credit is more important to your score than the credit mix.

Excellent = 22+, Good = 13-21, Fair = 6-12, Poor = 0-5


Source:   Pixabay

Source: Pixabay

1. Knowing Your Score - First off, you have to know your credit score to know where you stand and if an improvement is warranted.  This is the measuring stick.  Most credit card companies now give this to you free of charge by simply using their affiliated app or online portal.  It can also be obtained free by utilizing a budgeting service such as mint.

2. Knowing Your Credit - Secondly, a review your credit history is mandatory to help determine if any clean up is required.  This can be best accomplished through a thorough review of your credit report, which can be obtained online for free through numerous services these days; however, my favorite platforms are AnnualCreditReport.com and WalletHub because they attach no strings to the process.

Are there any red flags on your credit report that need to addressed?  Are there any discrepancies that aren't correct and need to be removed?

3. Tackle Problem Areas - Lastly but maybe most importantly, make sure to hone in on any of the 5 factors of your credit score listed in the prior section where you may be deficient.  Start addressing the areas of high impact first (Payment History, Amounts Owed), then work your way down the list.  Improving just one of these five areas can have a rather dramatic impact on your overall credit score.

Don't give those lenders, landlords, service providers, insurers, and employers an excuse to turn you down.  Get your credit score in good shape and you might find that better life and financial opportunities suddenly start becoming much more attainable.