What Is A Credit Score?
A credit score predicts how likely you are to pay back a loan on time. Companies use a mathematical formula or scoring model to create your credit score from the information in your credit report.
The credit report helps companies to offer you a mortgage, credit card, loans, or other credit products according to your capabilities. They are also used to determine the interest rate you receive on a loan or credit card, and the credit limit.
Credit agencies collect the following information to create a credit report:
- Your name and any name you may have used in the past in connection with a credit account, including nicknames
- Current and former addresses
- Birth date
- Social Security number
- Phone numbers
- Current and historical credit accounts, including the type of account (mortgage, installment, etc.)
- The credit limit or amount
- Account balance and payment history
- Date the account was opened and closed
- The name of the entity you owe money to
Collection items /Public Records
- Civil suits and judgments
A credit report may include information on overdue child support.
- Companies that have accessed your credit report.
How Is A Credit Score Calculated?
Credit scoring companies calculate your scores from the data in your credit reports. Credit scores can be obtained score from your credit card company, financial institution, or loan statement. You can also use a credit score service or free credit scoring site.*
Some factors that are considered for a credit score are:
Payment history: Even one late payment can hurt your credit health
Current debt: the amount owed typically impacts your ability to pay all monthly credit obligations on time
Total accounts: Credit cards, auto, or student loans
Credit age: Average age of open accounts
Credit card usage: Try to stay under 30% - you don't need to carry any credit card debt to build your credit
Credit applications: Try to plan ahead and minimize hard inquiries at least 9-12 months before applying for a mortgage or big loan
Derogatory marks: Collections, bankruptcies, civil judgments, or tax liens
Any credit score depends on the data used to calculate it and may differ depending on the scoring model, the source of your credit history, the type of loan product, and even the day when it was calculated.
Usually, a higher score makes it easier to qualify for a loan and may result in a better interest rate. Most credit scores range from 300-850.
*It is important to know that there are many credit scores available to you as well as to lenders.
What Factors Affect Your Credit Scores?
The two major scoring companies in the U.S. are FICO® and VantageScore. A FICO score is a three-digit number, that tells lenders how likely a consumer is to repay borrowed money based on their credit history. VantageScore was created by the three credit agencies, to help consumers gain more credit access, and allow lenders to make better lending decisions.
Perks Of Great Credit
1. Easier to Buy a Home: You're more likely to get approved for a mortgage when your credit is strong. This increases your purchasing power in a market where record low-interest rates have already made many homes easier to afford.
2. Lower Interest Rates on Loans: A good or excellent credit score earns you a lower interest rate on most loans and gives you the power to negotiate other elements, like a better repayment plan or higher principal.
3. Discounts on Car Insurance: Insurance companies won't turn you away for bad credit, but they may raise rates. Maintaining good credit could lower your monthly premium.
4. Get a Better Phone Plan: Excellent credit can determine whether your wireless carrier grants you a contract with potential discounts or a costly month-to-month plan that often requires a security deposit.
5. Secure the Best Credit Cards: If your credit is in a good place, you could qualify for credit cards with excellent incentives and benefits. You may also land a higher credit limit if you've been proven to pay your bills on time.
6. More Options For Renters: Good credit shows landlords you are responsible, which can potentially lower your security deposit as well as any fees required upfront.
Tips For Building Excellent Credit
Strong credit matters - check out these tips for building and maintaining an excellent credit score!
Pay on Time
Payment history is the largest part of your score, so pay bills on time to keep your score high.
Pay Attention to Your Score
Monitor your credit score regularly to know where you stand. Consider running your credit report to check for possible errors if it's lower than you thought.
While negative credit information is frustrating, it typically ages off your credit report after a few years, depending on the situation.
Keep Balances Low
Aim to use less than 30% of your credit limit (Under 10% is even better).
DISCLAIMER: We are not experts on credit building, this information is deemed reliable but is not guaranteed. Please consult your own professional advisor.