Credit 101, the subject they skipped in school. Why you ask? Well your credit score dictates how much interest you pay on loans. If everyone had good credit, lenders wouldn't make much money. So here we will discuss what factors impact your credit score, how to rebuild it and maintain the power of your signature.
Your credit report includes information about where you live, where you work, how you pay your bills, whether you’ve filed bankruptcy, and if you’ve been sued. Your report is maintained by credit bureaus. There are three major credit bureaus – Equifax, Experian, and TransUnion.
Credit bureaus collect information from credit card companies, banks, virtually anyone with whom you have an agreement to pay. The information is compiled and sold to businesses who want to view the information to make a credit decision about you. The Fair Credit Reporting Act, FCRA, limits the businesses that can access your credit report to those that have “permissible purpose”.
Your creditors and lenders send information about your accounts to credit bureaus. This includes monthly payment status, account balance, credit limit, account status, and any other information that can be used to determine your creditworthiness. Once the information appears on your credit report, it’s available for future creditors and lenders to see.
Checking your credit report periodically is important for maintaining financial health. You can obtain a copy of your credit report by contacting any of the three credit bureaus. The FCRA allows you to order a free copy of your credit report from each of the three credit bureaus each year.
Your credit score is a numerical summary of your credit report. Since it's a number, creditors and lenders can easily assess your credit risk to make a decision about extending a loan or credit card to you. Credit scores range from 300 – 850.
Consumers with higher credit scores are considered to be less risky borrowers than those with lower credit scores. Higher credit scores allow you to get lower interest rates on credit cards and loans, lowering the cost of having credit. Consumers with low credit scores usually have higher interest rates and might be denied for some credit cards, loans, and other credit-based services.
There are many different methods of credit scoring and some lenders even have their own credit score. The most widely used version of the credit score is the FICO score, named for Fair Isaac Corporation, the company credited with developing the score.
All three major credit bureaus have their own version of the FICO score. Equifax uses the Beacon system, Experian uses the Experian/Fair Isaac system, and TransUnion uses the Empirica system. Even though the systems are different, each produces comparable scores.
Credit scores aren’t included in the free annual credit report benefit enforced by the FCRA. Instead, you must purchase your credit report from the credit bureau issuing your credit report or from myFICO.com, a Fair Isaac division.
Payment history is 35%
Lenders are most concerned about whether or not you pay your bills. The best indictor of this is how you’ve paid your bills in the past.Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.
Debt level is 30%
The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization – the closer you are to your limits – the lower your credit score will be. Keep your credit card balances at about 30% of your credit limit or less.
Length of credit history is 15%
Having a longer credit history is favorable because it gives more information about your spending habits. It’s good to leave open the accounts that you’ve had for a long time.Inquiries are 10%Each time you make an application for credit, an inquiry is added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your credit score calculation only considers those made within a year.
Mix of credit is 10%
Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.