When you apply for a loan, a cell phone, a rental property, or a number of other activities, lenders and potential financiers will examine your credit score to assess your financial stability and the risk of defaulting on a financial obligation. The better your score, the more options will be available to you, including higher chances of loan approval and better loan terms.
Here is an overview of the financial activities that affect your credit, along with some tips to improve your score.
How do credit scores work? There are many different types of credit scores, but the FICO score is the one used by most lenders. Scores range from 300 to 850 points. According to FICO itself, scores are based on these five factors:
1. Payment history: Payment history accounts for 35% of your credit score and reflects how consistently you have made payments on time.
2. Amount owed: The amount of outstanding debt represents 30% of your score. The lower this amount, the higher your credit score.
3. Length of credit history: Your credit history, which accounts for 15% of your credit score, is based on how long you have had credit accounts open in your name. A longer credit history can help your score.
4. New credit requested: Credit inquiries count for 10% of your score. Each time you apply for credit, your score drops — with one exception: when you are comparing mortgage, student loan, or auto loan financing, credit scoring models only count one inquiry if your shopping comparison is done within a 14 to 45-day period. Note that inquiries will affect your credit even if you are denied or decide against the loan or credit card. Each inquiry affects most scores by 5 points or less and can remain on your report for up to 24 months.
5. Types of credit you use: The last 10% of your score is determined by whether you can responsibly use different types of credit, such as installment and revolving debt.
You can obtain your free credit report from the three major credit bureaus once every 12 months at www.annualcreditreport.com or by calling 877-322-8228.
What behaviors are good for credit? Your credit score naturally rises and falls as you go about your daily life. However, these actions are associated with good credit:
• Making payments on time.
• Keeping your debt load manageable.
• Using as little of your credit limit as possible.
• Paying the total amount due, or at least more than the minimum due.
• Reviewing credit reports annually.
• Not seeking too much credit. How can you improve your score? If your current credit score has been damaged or is low, set a goal to improve it. In addition to smart credit management, consider taking the following steps:
• Sign up for a free financial education class to gain the necessary foundations to improve your finances and your credit.
• Build credit through rent payments. Unfortunately, rent payments are not automatically included in your credit score. This means that for many people, their largest monthly expense does not help them build credit. Talk to your landlord about reporting your payments to the three major credit bureaus. If they cannot do this, you can do it yourself through a rent reporting service.
To learn more, visit myhome.freddie-mac.com/renting/how-get-your-rent-reported-credit-bureaus.
A good credit score expands horizons. No matter where you are in your financial journey, you can take steps to improve your credit and live the life you want.
Source: StatePoint