What factors determine the credit score?
Ever wonder why the credit score is so important and/or what factors cause the credit score to increase or decrease? Below is everything you need to be aware of!
1. What is a Credit Score?
A credit score is a 3 digit number that will dictate what interest rate you will receive on a mortgage, car loan, credit card and most other types of loans. It gauges your financial success. The higher the credit score, the better!
2. How many credit scores do I have?
You have three credit scores – one from each of the three credit bureaus: Experian, Equifax and TransUnion. The scores from each may differ slightly!
3. Is a credit score different from a credit report?
A credit report is a summary of your recent financial/credit transactions – all of this information makes up your credit score. You are entitled to one free credit report each year by going to www.annualcreditreport.com. You do not get a free credit score annually and you’ll have to pay to see your credit score. Go to www.myfico.com to view your credit scores.
4. Does my credit score decrease each time I check it?
If you personally check your credit score, the score does not decrease. There will, however, be a fee associated with your inquiry. If you are applying for new credit, such as a mortgage or a car loan, then this may result in a 5 point decrease in the score.
5. What factors determine my credit score?
1. Payment History = 35% – Payment history takes into account if you are late on paying bills (that’s why it’s so important to pay your bills on time!). It also takes into account your mortgage debt, credit cards and if you have any liens or judgments against you.
2. Amounts Owed = 30% – This takes into account the amount of debt you owe. Credit scores do not like credit card debt. 30% of your credit score is what’s known as your debt-to-credit limit ratio (what you owe over what your available credit line is), which increases with more debt and a high debt-to-credit ratio lowers your credit score. More savings can help you to pay down that debt, which will lower the debt-to-credit limit ratio, which will raise your credit score. This part of the credit score also includes the amount of credit card accounts currently open and what the balances are on each.
3. Length of Credit History = 15% – This is why it isn’t a good idea to close down credit card accounts – even if there is no balance on them. When you close down a credit card account, you are erasing credit history, which is 15% of your score. Closing down credit cards also lowers the available credit you have and if you’re planning on applying for a mortgage any time soon, lenders like to see an abundance of available credit. If you have credit cards that have no balances on them, yet you feel tempted to use them to buy things to don’t need, then simply cut up the credit card!!
4. New Credit = 10% – You’ve probably heard that opening up too many credit cards in a short period of time will hurt your credit score – and that’s right! Like we said above, it’s good to have plenty of available credit, but too much credit too fast can negatively affect your score.
5. The Types of Credit You’re Using = 10% – What kind of credit do you have and from where? Do you have department/retail store credit cards; do you have a traditional credit card from a major credit card company? Do you have a mortgage or a car loan?
6. How can I improve my credit score?
1. Pay your bills on time
2. Pay off all credit card debt
3. Refrain from closing down credit card accounts
4. If you can’t pay off your credit cards – take action and get help! Visit our Credit Cards section for more information.