7 steps to decoding and building your credit

The financial importance of building and maintaining good credit can’t be overstated. It doesn’t need to be difficult, yet for the most part, the math and meaning behind our credit scores can seem as esoteric and mysterious as black magic. For example, rent can be our largest monthly expense, but for some reason, it doesn't always count toward our credit? That seems bananas! Which is why, at Toggle^®, we did something to rectify that situation. More on that later.

This piece will cover the good-credit fundamentals, some potential pitfalls and some helpful hints to realizing credit score success, even if your numbers have taken a tumble. What’s a good credit score? How do you get one? How do you build your credit? Hopefully, you’ll find some of the answers you need right here.

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1. What is credit?
Put simply, credit quantifies the level of financial trust you’ve earned, using a three-digit score. The higher your score, the more trustworthy you are in the eyes of those who might lend you money. Or, if they do lend you money, a higher score may dictate a lower interest rate called a “tier.” When you apply for a car loan, an apartment or mortgage, financing on something expensive like furniture or even when you’re applying for credit, your credit score determines whether or not you will qualify for a loan and the interest rate you’ll pay. Check out this site to learn more about your credit. 

The first key to credit is building a credit history. You might be the most trustworthy person who ever lived, but without any history, there’s no way to prove it. 

For example, it might seem very responsible to pay for everything in cash and never use a credit card. You never spend more than you earn. You never owe anything to anyone. And that’s all very admirable. Unfortunately, it doesn’t establish your credit history on paper. So when you’re trying to get an apartment, for example, your landlord has no way of knowing that you’re a person who pays bills on time.

Is that fair? Maybe or maybe not. But it is a fact of financial life, so it’s a program worth getting with.

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2. What is a good credit score?
We’re accustomed to getting graded on scales from 1–10. Or 0–100. Or alphabetically from “A” down to “F.” According to the Fair Isaac Corporation, the creator of the FICO^® score, most credit scores range from a low of 300 to a high of 850, where 300 is an “F,” and 850 is an “A++.”¹ 

Within that broad range, there are shades of good and bad. Your scoring range depends on which of the two credit scoring models are being used — two examples are FICO^® and VantageScore^®.

Using the FICO^® model, the ranges are:¹

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

Using the VantageScore^® model, the ranges are:²

• 300–499 = Very Poor
• 500–600 = Poor
• 601–660 = Fair
• 661–780 = Good
• 781–850 = Excellent

If you’re not at 850, do not sweat it. According to FICO^®, as of April 2019, only about 1.6% of all Americans have a perfect 850 credit score. And some experts say any score of 760 or above will get you pretty much all the benefits of credit perfection.

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3. How are credit scores calculated?
To understand your credit score, it helps to know the credit ingredients. As with the scoring models, FICO^® and VantageScore^® have two different scoring formulas (“formulae” if you’re fancy).

FICO^® breaks it down like this:³

• 35% payment history: Pay your credit accounts on time.
• 30% amounts owed: How much debt you carry in total. Credit utilization (percentage of a person’s available credit that is being used) is an important part of this. Using a lot of your available credit may mean you are overextended. Experts suggest keeping your ratio of debt to credit at no more than 30%. I.e., if your credit card limit is $1,000, then it’s best to keep the balance you carry at or below $300.
• 15% length of credit history: Obviously, the length of time you’ve had credit matters.
• 10% new credit: How often you apply for and open new accounts.
• 10% credit mix: Having a variety of installment loans and revolving credit accounts, including credit cards, auto loans, mortgages and personal loans.

And VantageScore^® looks at it like this:⁴

• Extremely influential: Payment history.
• Highly influential: Type and duration of credit and percent of credit limit used.
• Moderately influential: Total balances/debt.
• Less influential: Available credit and recent credit behavior and inquiries.

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4. Starting from nada.
Now that you’ve got a grasp of the jargon and rules, how do you get credit if you’ve never had any?

First thing to know is that you don’t get good credit instantly. It takes time. What the credit people are looking for is for you to pay with regularity, on time, every month, month after month. It doesn’t have to be a big payment; they’re just watching your consistency. 

Get a secured credit card, a credit builder loan or a retail store card. Use no more than 30% of your credit limit, and don’t open multiple credit accounts. Pay on time every month. Watch your credit score climb. Easy, right? 

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5. Bad credit?
If your credit has fallen into disrepair, pulling it back out of the ditch can feel daunting. Don’t despair. You’ve got avenues back to credit’s good graces; you’ll just need some discipline and, depending on your methods, maybe some cash on hand.

• A secured credit card is just a credit card that requires a collateral deposit. You put down between $200 and $2,500, then just use the card as you regularly would and pay the bill on time. Once you’re back on your feet, the collateral deposit is refunded.
• Check out credit-building products like “Self.” Self is a credit-builder loan. Like any loan, you pay it back over a determined period of time. Unlike other loans, you don’t get access to the principal until you’ve made all the payments. But after that, the loan principal is yours, minus interest and fees — you’re paying yourself monthly, and the interest is what you’re paying to improve your credit.
• There are some credit cards marketed toward people with bad credit. All the same rules apply: Use it conservatively. Pay your bill in full. With these products, beware of the interest rates and terms. When you have bad credit, predatory products abound and can make things even worse.

None of these solutions is without a little pain in the short term. Whether it was your fault or not, your bad credit score means you’re a bigger risk to a lender. It takes effort to improve your score; however, keep in mind, the effort will be worth it in the long term. And the long term really isn’t that long in the grand scheme of things.

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6. Checking your credit.*
*MYTH BUSTED: Checking your own credit will not damage it. Credit bureaus know the difference between when you check your credit history and when a lender or credit card company does it. To use the credit bureau language, there are “soft inquiries” and “hard inquiries” on your credit. 

A soft inquiry is when you or maybe a credit card company or insurance company, such as Toggle^®, check your credit score in order to pre-approve you — these checks do not impact your credit score. Don’t worry about these. 

The ones you worry about a bit more are the hard inquiries. This is when credit card companies or loan companies run a check on your credit — and these will ding your credit score. According to FICO^®, usually by only about five points.⁵

Of course, if you’re accepted for that credit line, it’ll bounce back, but generally speaking, you should keep credit applications to a minimum. Especially don’t apply again and again in a short period of time.

Checking your credit on a regular basis with what’s called a “soft inquiry” — a check that’s not initiated in order to obtain a loan or line of credit — is a good habit to get into. It allows you to take action if necessary, and if you become a victim of identity theft, it allows you to rectify the situation before long-term damage is done. For this reason, it’s smart to sign up for a credit monitoring service that will let you know if there is any suspicious activity. In case you’re looking for one, Toggle^® offers this with an insurance policy. Something to check out!

These days, most credit card issuers provide you with your score free of charge online. Just log in to your account via their site. You can also ask FICO^® or VantageScore^® to pull your score. Most resources also provide tips to help as well.

In addition to a credit score, you can also obtain a free credit report, which is basically just the long-form credit history on which your score is based. The law entitles you to one free credit report from each of the three credit bureaus — Experian^®, Equifax^® and TransUnion^® — annually. You can access those reports at annualcreditreport.com.*

*Important: It’s best to access these reports one at a time — one every four months — as opposed to all at once. This will also give you a more regular insight into your score.

Congratulations, you’ve now earned your credit black belt!

Okay, technically, there are no belts for financial kung fu, but hopefully what you’ve learned here is enough to get your credit rating rolling and give you the confidence to seek out any additional information you need. 

When you think about it, financial institutions want you to have good credit, and they’ll do what they can to help you build it. Good credit makes you a much better customer for them, so it’s in their best interest to help you. Ask more questions, get more answers and build better credit.

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¹ ficoscore.com/education
² vantagescore.com/press/what-is-a-good-credit-score-and-how-to-get-one
³ myfico.com/credit-education/whats-in-your-credit-score
⁴ vantagescore.com/consumers/education/tips-about-credit/how-credit-scores-work
⁵ myfico.com/credit-education/credit-reports/credit-checks-and-inquiries