Get to Know Your Credit Score

By on December 15, 2018

Credit Score Basics

When you are applying for credit – whether it is for a car loan, student loan, credit card or mortgage – lenders want to know your credit risk, to know how likely someone is going to pay back their loan. Your credit score is a number which summarizes your credit risk based on a snapshot of your credit history. It tells lenders whether or not you’re good about repaying your debts and paying them back on time. If you pay on time and don’t carry a lot of debt, then you are not a credit risk, and you’ll get loans or credit cards with competitive interest rates. If you pay late and max out your existing cards, you either won’t be eligible for additional loans or you’ll end up with much higher interest rates.

Understanding Your Credit Score: The Major Players

When it comes to credit scores and reports, there are three major players: Experian, Equifax and TransUnion. These are the three credit bureaus are reporting agencies which collect information (about your lending habits, compile credit reports, and determine your credit score. These reports include several basic elements:

  • Your personal identifying information, such as current and past addresses and your Social Security Number (SSN).
  • A list of credit accounts – trade lines – a list of creditors who report your credit usage and payment history.
  • Any public record information dealing with financial institutions, including payment histories, bankruptcies, foreclosures, delinquent accounts, wage garnishments, and reports by collection agencies.
  • And the last two years of credit inquiries to view your report made by any institution or business needing to assess your credit risk (usually credit card companies and employers).

Understanding Your Credit Score: What Goes into a Credit Score

All the information on your credit report is measured and weighed before the credit bureaus assign a score to your report.   FICO calculates a number for financial institutions to compare individuals – this is your credit score.  Each bureau has a slightly different way of determining your score by weighing a particular set of factors into your credit score count more than others:

  • Payment History: On-time payments mean a higher score. Late payments, delinquent or overlimit accounts, bankruptcies, and liens will significantly lower your score.
  • Credit History: This shows how long you have been using credit and how you have managed your finances in the past. The longer your credit history, the better, so avoid closing accounts which have been opened longer, even if you don’t use them.
  • Debt-to-Credit Ratio: Maxing out your credit lines can lower your score. This is specific to your credit card accounts. Creditors don’t want to see you maxing out your entire credit limit. For example, if you have a credit card with a $1000 limit, you should not owe $950, instead you should be paying off you card so you have around $700 available. Try to keep your total revolving utilization ratio as low as possible – 30 percent is good but 25 percent is better and if you really want to maximize your credit score, aim to keep your revolving utilization at 10 percent or less. This goes for your total revolving utilization and for each individual credit card.. If you have an excess of available credit, ask your credit issuer to reduce the amount on credit lines you’re not utilizing.
  • New lines of Credit and Report Inquiries: This includes accounts you’ve opened recently, and recent inquiries from companies you have applied to for credit. Credit inquiries remain on your credit report for two years but are only factored into your credit score for the first 12 months. The main point to remember is that applying for a lot of credit in a short period of time can lower your score.
  • Diversity of Credit: Having credit cards is a great credit builder, but lenders want to see that you can manage other types of credit as well, such as installment loans and mortgages.

Understanding Your Credit Score: Keeping Tabs on Your Credit Score

Creditors and credit bureaus are watching your credit – you should too! Experts recommend that you review your credit reports at all three bureaus at least once a year to make sure there are no inaccuracies. There are a number of non-profit organization which will give you a summary of your credit score for free, alert you of changes, and keep an up to date tab on your credit history. If you do find errors, each credit report will direct you on how to file credit disputes with each of the individual credit bureaus.

In the end, your credit score is your responsibility. Making the grade is a lifelong test on which you’re constantly being graded. Building good credit habits should be a top priority.

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About Terri A. Kamoto

Senior writer for FSN - Terri is a former financial analyst dedicated to making personal finances, budgeting, investment and insurance advice accessible, up to date and easy to understand. It is hard to find professional advice written in a language someone without a financial background can understand. Terri helps companies synthesize industry lingo and expertise into clear and informative content which builds smarter, financially successful individuals. You can find Terri on !

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