Credit Scores and Reports 101 (Credit Card and Loan Basics 2/3) - YouTube

Meet Jasmine.

Jasmine is a college student attending State University.

Like many college students, Jasmine has seen a lot of her friends and family use credit,

whether it's through a mortgage, a private student loan, or simply a credit card.

However, Jasmine has always been too afraid to use credit herself, leaving left her with

no credit history and a non-existent credit score.

What should Jasmine do?

Well, beyond watching our two other introductory videos centered around credit, “Credit Cards

101” and “Loans 101”, her next step is simple: understand her credit report and

score.

A credit report is straightforward.

It’s essentially a detailed history of your credit, covering everything from your payment

history to the age and status of your accounts, as recorded by the three major credit bureaus

in the United States: Transunion, Experian, and Equifax.

As you imagine, this is quite a lot of information for anyone to process, so one company actually

created a simple way to summarize this information called a FICO credit score.

This is a calculated number between 300 and 850 that summarizes your credit report.

The higher your score, the lower the interest rates and the better the rewards you’ll

get from banks, plus a high credit score is also vital for a number of other things, like

getting affordable insurance, finding an apartment, or even qualifying for a cell phone plan.

Ironically, for such an important number, getting your credit score actually used to

be quite difficult, and expensive, but now we recommend several websites that make it

free and easy for you to get your credit score and report online.

This is great for Jasmine, but she’s still confused about one last thing.

What exactly makes up a credit score?

Well, a credit score is actually made up of five parts, and from understanding each one,

you can derive the four major ways to improve your credit score.

Part 1: Payment history, 35% of your score.

Because this is such a large number, it reveals the importance of paying every bill on time,

even if it’s just the minimum.

If you’re struggling with this, we highly recommend setting up automatic payments for

everything, especially your credit card.

Part 2: Credit Utilization, 30% of your score.

To avoid damaging this, we recommend not exceeding more than 30% of your maximum credit line

both total, and for each individual account.

If you’re struggling with this, try paying off your balance early a few times a month,

or asking your bank for a credit line increase.

Part 3: Length of Credit History, 15% of your score.

The existence of this component means, rather counterintuitively, that you shouldn’t close

out your old credit accounts unless you absolutely have to, as otherwise you’ll hurt your credit

score.

Part 4: Recent Inquiries for Credit, 10% of your score.

This one’s simple.

Don’t apply for new credit cards and loans unless necessary, as each credit inquiry will

slightly lower your credit score by a few points the next twelve months.

Finally, Part 5: Types of Credit Used, 10% of your score.

Unfortunately, we don’t have a rule for this one, as we just don’t recommend applying

for multiple types of credit just to boost your score.

Finally, before we conclude, we just have two things for Jasmine to keep in mind.

One: To build a credit history, and thus a credit score, you’ll need to use credit,

and easiest way to this is open a credit card, like a student or secured credit card, that

is designed specifically for people with no credit history.

And don’t worry, we teach you everything you need to know in our two videos “Credit

Cards 101” and “How to Rebuild Your Credit”.

Two and Finally: Be sure to check your actual credit report for mistakes at least once a

year, as these errors can dramatically affect your credit score.

Should you find one, be sure to contact the credit bureau as soon as possible.

Hopefully you and Jasmine now better understand how credit scores and reports work.

Be sure to check our next two videos, which cover common mistakes and best practices for

credit cards and loans, and be sure to check out our website, where you can find more educational

content, your free credit score, and great credit card recommendations.