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Maps aren’t very helpful if you don’t know where you are. You can easily spend a lot of time walking down the wrong path and get even further away from your goal. Similarly, to improve your credit you need to first understand what your credit score is and how it works. Without this information, you won’t be able to effectively improve your score because you won’t understand how the things you do in daily life affect your score. You will also be at the mercy of any company that tells you how you can improve your score – on their terms and at their price.

Our goal is to not only improve your credit, but to empower you with the information you need to maintain a good score. So, let’s get into it.

What is a Credit Score?

The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.  The higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates.  Scores in the low 600s and below will often cause you trouble finding credit, while scores of 720 and above will generally give you the best interest rates out there.  However, credit scores are a lot like GPAs or SAT scores from college days – while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways.  Some lenders put more emphasis on credit scores than others.

Some lenders will work with you if you have credit scores in the 600s, while others offer their best rates only to those creditors who exceed their high cut off. Some lenders will look at your entire credit report while others will accept or reject your loan application based solely on your credit score.

How is my credit scored determined?

The credit score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use algorithms to arrive at a credit score from the information contained in your credit report.

It works like this: credit bureaus have clients – such as credit card companies and utility companies – who provide them with information about your debt/repayment history. As soon as you open a bank account or have bills to pay, a file is begun on you and information about you is stored on the record.  If you are late paying a bill, the clients call the credit bureaus and note this.  Any unpaid bills, overdue bills, or other problems with credit count as “dings” on your credit report and affect your score.  Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit score.

Your age, sex, race, and income are not part of the credit score math.  The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

How can this help me?

Understanding where your credit score comes from can help you make two important realizations:

1) Your credit score is not a personal reflection of how “good” or “bad” you are with money.  Rather, it reflects how well lenders and companies think you will be at repaying your bills – based on information gathered from studying other people. Always remember that you are way more than a number.

2) If you want to improve your credit score, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills.  You do not have to work hard to reinvent yourself financially and you do not have to start making more money.  You just need to be a reliable borrower.  This realization alone should help make credit repair far less stressful!

At Sherpa Credit, we understand that you are more than a number. Your credit score should not stand in the way of your goals. We are here to help you navigate the world of credit so you can move on to climbing the mountains that matter most. Contact us today and let us be your guide.