Understanding Your Credit Score

Your credit score is a number between 300-850 that gives lenders an idea of your ability to repay loans in a timely manner. The higher your score, the better chance you’ll have of securing a loan with a lower interest rate, which means you’ll pay less money in interest over the life of the loan. 

Typically, scores above 700 are considered good; scores above 800 are considered excellent. Scores below 640 are usually considered in the ‘needs improvement’ range, and can prevent borrowers from getting better rates. 

In this article we discuss the “Big 5” factors influencing your score, four ways to improve your credit score, and three myths about credit. 

“Big 5” Factors Influencing Your Credit Score:

  1. Payment History – 35%: The biggest concern lenders have when making a loan is whether they will get their money back, so your payment history has the greatest impact on your credit score. Things that can detract from your payment history are making late payments — and how late those payments were, if any of your accounts required a collections agency to capture missed payments, if you have any debt settlements, bankruptcies, etc., as well as how recent the last negative event took place and how frequent missed payments occur. Note that your payment history goes back seven years; anything older than that is wiped clean.
  2. Amounts Owed – 30%:  Making your payments on time is great – as long as you’re not overwhelmed by the amount you owe. Having a $0 balance on your accounts is certainly not necessary, as owing a little bit shows lenders that you are responsible and making your payments on time. 
  3. Length of Credit History – 15%: A longer credit history can be helpful, as long as it’s not marked by missed payments – but if you’re new to having credit, that’s okay too as long as you are making payments on time and don’t have a huge amount of debt. One tip some finance experts offer is to leave credit card accounts open, even if you don’t use them anymore, because having a long-standing credit account in good standing will help boost your score.
  4. Types of Credit – 10%: It’s also beneficial to have a mix of different types of credit that you manage responsibly – like student loans, auto loans, credit cards, and even a rental tradeline. Having a diverse credit profile is better for your credit score because it indicates you have experience managing various types of credit.
  5. New Credit – 10%: Each time you submit an application that requires a credit check, an inquiry is placed on your credit report showing that you’ve made a credit-based application. One or two inquiries won’t hurt much, but several inquiries, known as “credit shopping”, especially within a short period of time can cost you many points off of your FICO score. Keep your applications to a minimum to preserve your credit score. The good news is that only those inquiries made within the last 12 months factor into your credit score. Inquiries completely disappear from your credit report after 24 months. Note that checking your own credit report results in a “soft” inquiry, which does not affect your credit score.

Four Ways to Improve Your Credit Score

If you want to improve your score, it’s important to consistently demonstrate responsible financial behavior by doing a few things like always paying your bills on time and not having too much debt. Below are four ways to improve your credit score — and maintain a good score once you’ve gotten it where you want it:

  1. Pay Every Bill On Time – Your payment history is one of the top factors when calculating your score. Set up auto pay and reminders so that you pay each bill on time every month.
  2. Don’t Close Accounts with Good Histories – Closing an account isn’t always best for your credit score – particularly accounts with good histories. When you close an account it’s usually removed from your credit report, and that means you lose the credit history with that account.
  3. Keep Your Credit Utilization Below 30% – Your credit score may take a hit if your monthly statement balance is over 30% of your limit, even if you pay off your balance each month. Why? Because most likely, your statement balance has been reported to the credit bureaus and they like to see balances of less than 30% of the limit.
  4. Apply for Credit Only When Necessary – While having a mix of credit lines is good for your score, remember, if you apply for multiple lines of new credit, your score can take a hit.

Three Myths About Your Credit Score:

Myth #1: Checking my credit score lowers my score

Checking your credit score won’t hurt you but you need to do it right — meaning, you need to check it yourself. This is also known as a soft inquiry. Apps such as CreditKarma, RentReporters, Discover’s Credit Scorecard and Chase’s Credit Journey enable you to check your score for free whether you use their credit card or not. 

Myth #2: Your income affects your credit score

It’s widely believed that a person’s income level affects their credit score – and if you get a raise, your score goes up. A recent study by Credit Card Insider shows that roughly 2/3 of Americans believe this is true. Yet income has nothing to do with your credit score. 

Myth #3: Using debit cards will help your credit score

The same survey showed that 42% of people believe that using a debit card can impact your credit score. Even if you use your debit card and select “credit card” at the check-out terminal, a debit card is essentially the same as using cash and does not affect your credit.

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