What’s the big deal about maintaining a good credit score? The big deal is that a good credit score can get you a better rate on loans of all types — auto, mortgage, and consumer. Lenders look at your credit score to determine whether you are a good, average, or bad credit risk.
What Exactly Is a Credit Score?
A credit score is simply a number that lenders use to assess whether or not an individual will repay debts on time. Essentially, a credit score is the individual’s past credit history, current credit situation, and a prediction of how the individual will handle credit in the future all rolled into a single number.
Specialist rating agencies calculate credit scores using information from a person’s credit report. One of the more common and better-known credit scores, the FICO® Score, generally considers five factors, as detailed below.
Factors That Impact Your Credit Score
Your Loan Repayment History
Paying bills on time has the greatest impact on an individual’s total score. A history of late payments on several accounts will lower your score. However, you will increase your score by making credit card, retail account, finance company account, and loan payments consistently on time.
Your Total Debt
The amount of debt you carry affects your credit score. You will lose points on your credit score if you are maxed out on all of your credit cards. Since you want your credit score to be as high as possible before you apply for a new loan, you should spend some time trying to get your credit card balances down before you apply for new credit.
Your Credit History
The longer you have been using credit responsibly, the higher your credit score. The higher your credit score, the greater the likelihood that lenders will offer you loans on very favorable terms. This provides an obvious advantage to older consumers, but younger people and those just entering the workforce can build up a credit history by establishing one or two accounts and by paying at least the minimum by the due date.
Amount of Your New Credit Card
Do you know that ratings agencies track those times when your credit card issuer increases your credit line or you apply for a new, additional credit card or loan? This information appears on your credit report. If you apply for too much credit in a short time, your credit score could be negatively impacted.
Your Credit Mix
The types and number of accounts you have affects your credit score. While lenders generally like to see more than one type of credit in a person’s credit history, opening new accounts simply to have a more varied credit mix probably will work against your credit score.
Three Simple Ways to Improve Your Credit Score
Pay on time.
It is simple: Making all your payments on time will improve your credit score. It also helps you avoid late charges.
Pay more than the minimum monthly payment.
Doing so will lower your balances faster, which, in turn, will improve your credit score.
Know your limits.
Lenders look at your “potential debt” as well as your actual debt when assessing your credit score. So, limit the number of credit cards you own. And don’t ever charge more than the credit limit on your card.
A financial professional can help you understand how to use credit wisely and how to take control of your debts and improve your credit.
