Have you ever wondered what your credit score means? Or, what factors are taken into consideration? To help you understand these questions and more, here are some facts about your credit score and what it means.
What is a credit score? A credit score is a 3-digit number that lenders use to objectively measure your creditworthiness. It allows creditors to rank you from high to low in respect to the likelihood of repaying credit. For example, if you have
a high score, you’re likely to repay. If you have a low score, you’re less likely to repay. Your credit score is a snapshot of your finances at a particular moment in time. As information in your credit file changes, so will your credit score. For instance, if you use your credit card, or pay the auto loan company, these activities are going to change the information in your credit file.
What factors are taken into consideration for your credit score? There are five different categories that are considered for your credit score.
Payment History: This is probably the most important factor. Have you had an account sent to collections? How many times have you been late? How late or how recent were those late payments?
Total Debt:
How much overall debt do you have? How many credit cards have balances on them? How many are close to their limits? How close are you to your overall credit limit?
Length of Credit History:
Is this person an emerging consumer or someone who has paid bills on time for 10 years?
New Credit:
Are you shopping for credit right now? A lot of activity and inquiries on your credit report raises suspicion. Perhaps there is a change in your life that is not reflected on your credit report, like a divorce or lost job. These situations may impact your financial situation.
Credit Mix: Do you have a “healthy” mix of credit bank cards, secured loans, mortgage loan, and so on?
What happens if I have a low credit score? Each lender sets different ranges for what is considered “good” and “bad” credit scores. An average person with “good” credit has a score of 650 or higher on a scale of approximately 900. Having a lower score means you may be denied a loan because you are too high of a risk considering your credit score.
What can you do to improve your credit score? Changing your credit score in a short period of time is not easy to do. This is because your credit score takes your entire credit history into account. If you consistently pay bills late, you will have to change your habits to see a change in your credit score. One of the best ways to improve your credit standing is to pay bills on time and keep your balances low on your credit cards or any other revolving accounts. Also, check your credit report once a year to make sure the information is correct. Inaccurate information could negatively influence your score.
Where can you find your credit score? Companies like Experian, Equifax, and Trans Union can give you your credit score and an explanation behind it. You can write or call them for a copy of your credit report. There typically is a minimal fee involved. Here is the information on the top three credit reporting companies:
Experian PO Box 949, Allen, TX 75013-0949; 1.888.EXPERIAN (888.397.3742)
Equifax PO BOX 740241, Atlanta, GA 30374-00241; 1.800.685.1111
Trans Union PO BOX 1000, Chester, PA 190222; 1.800.916.8800
