Answering the credit score questions
Your credit rating can affect many of the important financial decisions in your life. It can be a factor in everything from interest rates to opening a bank account to a job application. Here are some answers to the most frequently asked credit score questions.
What is a credit score?
Most people have a credit score. A credit score is a number determined by a credit bureau that helps lenders assess how well you’ve managed your financial obligations. It’s based on your behaviors and determines eligibility for things like credit cards, home loans and more.
What makes up a credit score?
While there is no single formula that determines a credit score, here are some categories and their relative importance that are considered when establishing a score.
- Payment history (35%). Your consistency in making payments on time.
- Total amount owed (30%). Includes the ratio of what you owe to the amount of credit that’s available.
- Length of credit history (15%). How long you have been using credit.
- New credit accounts and inquiries (10%). Accounts you’ve recently opened and inquiries from creditors.
- Types of credit in use (10%). Your outstanding credit accounts including credit cards, installment loans, mortgages and others.
What do the numbers mean?
Most credit scores rank individuals on a scale from 350 – 850. The higher the score, the less you are seen as a financial risk to creditors, prospective employers and landlords.
How can I affect my credit score?
There are a number of ways to improve and hurt your credit score. Remember these tips when it comes to dealing with your finances.
Improve your score
- Consistently pay bills on time.
- Pay monthly balances in full.
- Check your credit report regularly for accuracy.
- If you choose to borrow, try to keep your account balance around or below 50% of your credit limit.
Hurt your score
- Fail to make even the monthly minimum payments on credit cards and loans.
- Exceed your account limits.
- File for bankruptcy or get your account turned over to a collection agency.
- Apply for a lot of credit.
How do credit cards relate to my credit score?
Responsibly using credit cards is an easy way to help improve your credit score. Here are a few tips to help build your overall credit score and prevent you from developing bad financial habits.
Use them regularly
Using your card every so often keeps it active, which shows lenders that you can handle credit and ultimately helps build your score.
Pay them monthly
Even if you can’t pay them off completely, you must pay the minimum monthly payment. If possible, try to pay more than just the minimum.
Keep them low
Keep your credit card balances below 50 percent of the approved credit limit. Always avoid using the full amount of your available credit.
Manage them properly
Excluding mortgage or rent, keep your monthly debt payments at less than 20 percentof your monthly income.
Who cares about my credit score?
Well, lots of people actually. Your credit score matters if you want to:
- Take out a loan
- Apply for a credit card
- Rent or buy a home
- Apply for a job
- Get insurance
- Purchase cars, large appliances, or cell phones
Where can I get my credit report?
There are three major credit bureaus that produce reports. You can receive one free report annually at www.annualcreditreport.com or by calling 1.877.322.8228.