Your credit score is a numeric value used by lenders to determine your approximate ability to repay a debt, largely based on your debt payment history. By having a high credit score you will have access to increased credit card limits, lower financing rates on auto loans, better terms on mortgages, and in general more negotiating power when dealing with financial institutions. Alternatively, a negative credit score can result in undesirable interest rates, prevent you from owning or renting a home, or even prevent the opening of a bank account. Because of the importance of this metric, it is important for you to monitor your credit score and report.
Furthermore, when a bank or lender makes a reference to your credit report they are not necessarily talking about the actual score, but the summary of your loans and debt repayment history.
The number of accounts, payment history, unpaid debts, late payments, and credit inquiries will all be in this report and contribute to your total score.
The following are a few of the factors used to determine your credit score and will be seen in the reports of all three agencies.
The number of years your credit accounts have been opened will play a part in your score. For a younger individual or individual with new or limited credit history, the score will suffer as a lender can’t gauge the borrower’s ability to pay as well as they can gauge someone with decades of history. For someone with extensive credit history having a good mix of accounts such as a mortgage, auto loan, and credit cards will make a positive contribution to a score as long as their payments are all made on time.
For your outstanding loans, an agency will take two factors into consideration, the amount of debt you owe and also the credit limits on your account. For example, for an individual with a credit card limit of $5500, a balance of $5000 will be damaging to the score, however, a balance of $5000 on a card with a $25000 limit will not have much of an impact. It is recommended to keep your balances under 25% of your total credit limit.
Payment history can be one of the largest factors in hurting a credit score. After a payment has been delinquent for 30 days it will be reported to the credit agencies, generating a mark on your credit. While paying on time may not be able to build an elite credit score alone, late payments can damage it severely and take years to recover from.
Experian, Equifax, and TransUnion are the three main credit reporting agencies that keep track of your credit history. When you apply for an auto loan, a home loan, or even a credit card, the lender will look to these agencies for your score to determine the amount you are eligible for and the interest rate they will charge.
Upon your request, by federal law, each of these agencies is required to send you a copy of your report once per year. By simply making the request on the company website you will have a copy in only a few days and be able to monitor all of your account and payment history as well as look for any fraudulent activity. A good strategy is to request a copy from each agency several months apart so you can review your credit report three times annually free of charge.
To protect yourself from credit card fraud and identity theft it’s important to ensure that you regularly review and monitor your credit score and credit report. This can ensure you identify any fraudulent activity quickly in order to minimize damage.