Your Credit Score And Factors That Affect It

Your personal credit score can have a significant impact on your everyday life. It is important to build and maintain a high credit score as it will affect the financing options available to you as well as the amount of interest you are paying on loans. Understanding the factors affecting your personal credit score will benefit you in the long run.

What is a Credit Score?

In the simplest terms, your credit score is a calculated number that reflects your ability to repay debt. In other words, your credit score is an indication of your credit-worthiness. It may vary slightly between the three main credit bureaus – Equifax, Experian, and TransUnion. Each of them uses their own credit scoring model to calculate personal credit scores which results in these slight differences. Differences could also result from lenders not reporting information to all three credit bureaus or not doing so at the same time.

However, the most widely recognized and utilized credit score is not calculated by one of the three main credit bureaus. FICO scores are calculated by Fair Isaac Corporation, which is a data analytics company. Although the base FICO score is the one most commonly used, there are also industry-specific FICO scores available, including ones for bank cards and auto loans.

Another credit score available is the VantageScore, a collaboration of the three major credit bureaus. VantageScore can calculate a personal credit score with less credit history than FICO scores.

Personal credit scores can be found on your credit report – a statement detailing your past credit activity and current credit status. The three main credit bureaus are responsible for creating your personal credit reports. You are entitled to receive one free credit report every 12 months from each of the three main credit bureaus.

Who Looks at My Credit Score?

Credit card companies, mortgage lenders, auto financing companies, and other financial institutions may view your credit score to determine how risky it would be for them to extend credit to you.

There are several other companies and institutions that may view your credit score and use it to evaluate your financial responsibility.

If you are looking to rent a house or apartment, property managers or landlords may look at your credit score to determine if you will be a tenant who makes rent payments on time.

In most states, insurance companies use credit scores to set insurance premiums. Research has found that those with higher credit scores are less likely to file insurance claims, and therefore are charged lower premiums. 

Before providing service, utility companies view your credit score to evaluate your ability to make monthly payments on time.

Although many believe that employers are able to view employees’ credit scores, this is not the case. Current and prospective employees in most states can pull a modified version of your credit report that excludes your credit score.

Why is My Personal Credit Score Important?

In general, your personal credit score affects your ability to finance large purchases such as homes and vehicles. If you are approved for financing, the lender will also use your credit score to determine how much it will charge you (interest rate) for the loan. 

Your credit score also helps credit card companies decide whether to approve you for a line of credit. Many people use credit cards for everyday and online purchases. 

To ensure you are approved for loans or lines of credit with lower interest rates, it is important to understand what factors affect your personal credit score.

What are the Factors that Affect My Personal Credit Score?

Personal credit scores are calculated based on several factors (Credit Karma). Listed below are the factors (and relative impact) considered when calculating your FICO score. Other credit scores such as VantageScore use essentially the same criteria.

Payment History (35%)

One of the most important factors, your payment history is a good indicator of your ability to make timely payments on your loans and bills in the future. Missing or late credit card or loan payments will have a negative effect on your credit score.

Length of Credit History (15%)

This portion of your score takes into credit/loan account the age of your oldest and the average age of all your open accounts. The age of your oldest open account will determine the age of your credit report. A higher age has a positive effect on your overall credit score.

Types of Credit or Credit Mix (10%)

The credit score calculation takes into account the different types of loans or credit accounts you have open. There are two general types – revolving debt and installment debt. Revolving debt includes credit cards, while auto and home loans fall into the installment debt category. Too much of one type of debt can have a negative effect on your credit score.

Credit Limits and Utilization (30%)

Also an important factor, it looks at how much you owe across all your accounts and what portion of your credit limits are being used (also known as your credit utilization rate). It is recommended that credit utilization rates be kept below 30%, but the lower the better. A high credit utilization rate deems you a risky borrower, making it difficult and/or expensive to take out a loan.

Credit Report Inquiries (10%)

When companies and institutions request to view your credit report, it impacts your credit score only if it is considered to be a hard inquiry. A hard inquiry is when an institution is seeking your credit information for the purpose of possibly extending credit or a loan to you. Each hard inquiry on your credit report negatively affects your credit score and remains on your record for two years. Other informational inquiries are known as soft inquiries and have no effect on your credit score.

It is also important to check your credit report periodically for any reporting errors or suspicious data. Identity thefts have damaging effects on credit scores and it could take a long time to reverse the damage.

There are other situations you may not realize affect your credit score. These include: 

1. Bills or penalties that go to collections including unpaid parking tickets, medical bills, and utility bills.
2. Actions that may increase your credit utilization rate, including paying off loans or closing credit card accounts. Your credit utilization rate would increase because these closed accounts would decrease your overall credit limit.
3. Any situation that requires a company to make a hard inquiry, including signing up for a cell phone plan, applying for insurance, or requesting a credit limit increase.

If you are struggling with a limited or bad credit history and are in the market for a car, Easton Motors can help. Even if you have already been turned down for credit elsewhere, we can help you find a solution. Learn what makes us different from other used car dealerships. We can help you build a good credit score.

Contact us –  we would be happy to answer your questions.