What is a credit score?
A credit score is a three-digit number, typically between 300 to 850, which credit bureaus calculate based on information in your credit report. It is a simple, numeric expression of your credit worthiness. Although the three credit reporting bureaus (Equifax, Experian, and Trans Union), use similar methods to determine a credit score, the formulas they use are not exactly the same and your credit score will vary from bureau to bureau. Credit scores play an important role in today’s digital economy. The interest rate you get on a home or car loan, for example, is determined by your credit score. Also, when you apply for a credit card or a charge card at a retailer, the answer depends largely on your score, and when you apply for insurance, most insurers will pull a copy of your credit score.
How is my credit score calculated?
How do my actions affect my credit score?
Q: How old are my credit accounts?
A: The longer you have had a credit account open and active, the more likely it will help stabilize your credit history and positively impact your credit score.
Q: Do I have enough different types of credit accounts?
A: Ideally, you will have at least four trade lines of different types, such as credit cards, student loans, a mortgage or home equity line of credit or perhaps an auto loan.
Q: Are my balances too high relative to my total available credit limit?
A: Creditors prefer to see a lower ratio of how much debt you’re carrying compared with how much available credit you have on a particular account. Ideally, you’ll use 30-50% of the total credit limit on any particular account. For example, if your credit card has a maximum credit limit of $1,000, carrying a balance above $500 on that card could negatively affect your credit score.
Q: Do I have any judgments, liens, foreclosures, bankruptcies, short sales or delinquencies that have been reported to creditors?
A: Having this sort of information on your credit history is extremely damaging to your credit score. If you have gone through a reversal of fortune, and had to file for bankruptcy or completed a foreclosure, your credit score will reflect this negative information for several years.
Q: Are there any factual errors?
A: If there are, you’ll need to dispute them with the credit reporting bureau.
Q: Have I made any late payments?
A: It’s important to pay every bill on time. Even one late payment can affect your credit score for up to two years.
Q: How many credit accounts or “trade lines” do I have?
A: If you have too many different credit accounts, it could negatively affect your credit score.
Q: How many new credit accounts have I opened?
A: Be mindful of opening too many accounts at once. Too many inquiries by prospective creditors in a short period of time may negatively affect your credit score.