Making Cents of Credit: Credit Score Basics
What Is A Credit Score?
Your credit score is the number (often somewhere between 300 and 850) that essentially determines whether or not you’ll get a credit card or new loan, as well as the accompanying interest rate.
Your credit score is also your borrowing history all boiled down to one numerical value. In short, this is actually the score that lenders use to realistically determine how fast (and whether or not you can) pay back borrowed money.
How Your Score Is Determined?
When we say your borrowing history builds your credit score, we mean your history of paying back past or current sources of debt. This can be credit card payments, mortgage payments, car loans, student loans, and more.
When you miss or default on a payment, your score takes a hit and goes down. When you consistently make sufficient payments on time, your credit score gets a boost.
The length of your credit history is also a determining factor. So, if you’ve been making regular payments on-time but haven’t been in debt to those servicers for very long, don’t sweat it. The longer your positive credit history is on record, the higher your score will eventually become.
Here are a few other influencing factors on your credit score:
- Amounts owed (have you maxed out your credit card? Your debt to income ratio should stay below 50% of your available credit)
- Credit mix (do you have an ample number of sources weighing in on your history? Do you have installment payments (car/mortgage and revolving payments?)
- New lines of credit (have you taken on several new sources of debt in a short span of time? Typically your credit score will take a brief hit with recent credit inquiries and lines of credit.)
Why You Might Have Multiple Credit Scores?
Lenders report your payment history to three different credit bureaus: Equifax, Experian, and TransUnion. As a result, your credit score might vary from one model to the next, depending on whether or not your lenders all report to the same bureaus.
That being said, these three bureaus are the ones who compile your payment information and develop a credit score to report to banks and lenders.
If you have further questions on your credit score and how it impacts your financial situation, call Dolaghan Law today at (904) 354-4935! Understanding your finances from a well-rounded perspective, including the implication of your current debt and credit, will empower you to take a more knowledgeable step into tomorrow. We look forward to helping you!
Now that you know what, specifically, your credit score means (and how lenders interpret it), it’s important to keep up with what will and will not hurt your credit score. This way, you can spend and borrow more mindfully, as well as push past some common myths surrounding your credit score.
What Will Not Affect Your Score:
Interest rates on current or past loans
Your interest rates are determined based on your current credit score when you apply for a loan or other form of borrowed money. However, your past interest rates will have no impact whatsoever on what your current credit score or future rates will be. They are a reflection of your past score, and nothing more.
You could be driving the nicest car or own the largest house but, at the end of the day, lenders will neither be impressed nor swayed by your assets. Otherwise, the credit bureaus do not have access to such personal information, as assets are not factored into your credit score calculation whatsoever.
Checking your credit score
A frequently perpetuated myth that is liable to scare consumers is that their credit score will take a hit every time they check they check it online. This is not true — only hard inquiries (official inquiries conducted by lenders or creditors) will impact your score.
What Will Affect Your Score
The amount of debt you owe
Your credit utilization can negatively impact your score if you’re a heavy borrower. The more money you borrow, the harder it will likely be for you to pay back all of your debt in a timely manner. Thus, you are seen by lenders and creditors as a high-liability borrower, and your score will sink lower than it otherwise would if your overall debt landscape were lower.
The timeliness of your payments
Any time you miss or default on a bill or loan payment, your credit score gets knocked down a notch. As a matter of fact, your payment history is the primary factor used to calculate your credit score, because your history essentially shows how dependable a borrower you will be. The more unpredictable or unreliable your past payments were, the lower your score will be.
Your credit age
Your credit age is regarded similarly to that of your payment history; that is, lenders are trying to determine your reliability as a borrower. The older you history account history — with regard to your oldest account as well as the average age of your combined accounts — the better.
If you have further questions on your credit score and how your daily use of your money affects that number — and thus your ability to successfully borrow at a low interest rate— call Dolaghan Law today at (904) 354-4935! We’re dedicated to empowering your steps to a more secure financial future.