If you are anything like me, balancing your checkbook is a chore! Keeping track of your finances and trying to find — and stick to — a budget that works for you is a huge step toward financial stability and freedom. But another important and often overlooked aspect of finances is your credit score.

At first, understanding a credit score seemed daunting and I didn’t know where to start. You might not either. But just know how very important it is to understand and build now so that when you need it down the road, there won’t be any surprises.

Credit Score

Setting the Record Straight

I always thought that even a penny of debt was awful and would count against me, but I was pleased to learn that as with all upstanding things in life, a credit score is about balance.

A credit score, or FICO score, is an analysis of a consumer’s credit-to-debt ratio. This indicates the credit-worthiness of a person, or how reliable you are to paying bills on time. FICO scores are used by banks, phone companies, insurance companies, landlords, and others to evaluate potential lending risk. It also determines if the person meets the inquirer’s qualifications, and can also determine loan interest rates and credit limits. This score does not take into account credit or savings accounts you may have; it is purely based on your credit-to-debt ratio.

How a FICO Score Is Calculated

One of the requirements for a credit score is an account which has been open for at least six months. So it’s smart to get a head start on your credit by opening a credit card as early as you can to build a credit history. Still, to build the “right” kind of credit history, it’s even more important to learn how to be responsible with the credit limits you’re given. Late payments greatly lower your credit score, so your best strategy is to establish a good track record of making your payments, or at least your minimum required payment, on time each month.

One of the things to remember is that there is no quick fix for repairing or improving your credit — it takes time. Be careful of any service that claims to “improve your credit fast.” You can’t remove what’s already listed in your credit history unless it is incorrect information, which you’re legally able to dispute, though it is a lengthy process.

Where to Get Your Score

There are three major credit bureaus, Experian, TransUnion, and Equifax, and while each have their own names for their particular credit scores, they all use the FICO as the accepted method. The FICO credit score ranges between 300 and 850, and typically, a higher score indicates a low risk (that’s a good thing). Since the FICO score is used by various corporations in different industries, the algorithm to determine the score has a slight adjustment for each type of credit. This means that within the same time period you could possibly have a higher credit score for credit cards versus your mortgage credit score. Lender criteria, threshold for risk, industry, and overall strength of the economy all factor into a bank or credit companies overall lending strategy.

Under the Fair Credit Reporting Act, you are legally entitled to one free credit report per 12 month calendar year from each of the three bureaus which can be accessed from AnnualCreditReport.com. (Note: This is only your credit report, but you can access your credit scores as an affordable add-on feature in the ballpark of $10.) Banks and credit card companies also often have offers to access your free credit report.

What’s On You Credit Report

  • Your personal info, like your legal name, address, social security number, date of birth and employment status.
  • Accounts, such as type of account, date opened, credit or loan limit, account balance and payment history. (Remember, a credit score does not take into account checking or savings accounts.)
  • Inquiries, basically a list of everyone who has accessed your credit report within the last two years. The report will include “voluntary” inquiries which include those that you have made or authorized such as loan and credit card applications as well as “involuntary” inquiries which could occur when a lender accesses your credit report to extend to you a pre-approval offer via mail.
  • Negative info, include missed payments, overdue debt from collection agencies, and public record info such as bankruptcies, foreclosures, suits, wage attachments and tax liens.

Moral of the story: Have credit cards but make sure to pay them each month responsibly. Someone with no credit cards tends to be categorizes as a higher risk since they don’t have an established credit history. So open a credit card early, and make sure to establish and maintain good credit. To learn more about FICO scores visit myFICO.com.

Photos courtesy of On.My.Toes.For.You and Frugal Beautiful

When did you open your first credit card? How do you keep it in check? Tell us in the comments section!