What it is and how to manage it for financial success.
A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports.
Your credit score is assessed when a lender examines your credit history or the summarized version also known as your credit report. Your credit score and credit report may determine your eligibility for loans on home and vehicle purchases. Your credit may also be considered when applying for a new apartment or by an employer during the hiring process.
This article will explain what a credit score is, what factors determine your credit score, and tips for improving your credit.
What is a Credit Score?
A credit score is a prediction of your credit behavior, essentially, how likely you are to pay back any money that you are loaned. Credit scores are an essential part of the lending process and provide potential lenders with critical financial information.
Equifax, Experian and TransUnion are the three major credit bureaus and each has their own separate formula to calculate credit scores. Scores can also be based upon the purpose of the transaction, i.e., for an auto loan, more weight is placed on prior auto loans than on credit card debt or unsecured loans. These bureaus compile information about your borrowing and repayment history and then when the time comes, release that information to any potential lenders you wish to do business with. These bureaus don’t make the lending decision themselves; they just provide information to potential lenders.
Your credit is established the moment you open your first credit account-loan, credit card, mortgage etc. Credit scores don’t appear as quickly with three to six months of activity being required before a credit score can be calculated according to Experian.
What Determines Your Credit Score
According to Equifax, your credit score is determined by several factors including:
- Your bill-paying history
- Your current unpaid debt
- The number and type of loan accounts you have
- How long you have had your loan accounts open
- How much of your available credit you’re using
- New applications for credit
Whether you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago.
Can I Check My Credit Score?
Many credit card companies offer the service of a free update on your credit score. Additionally, federal law provides each person with one free credit report annually. To access your free credit report, visit AnnualCreditReport.com. This will get you a free report from the three major credit bureaus however there is a fee for credit scores.
The type of credit check performed by lenders during the lending process is called a hard credit check. A “hard check", occurs when a creditor or lender takes the next step and begins processing your credit application. While these checks can lower your credit score, the changes are not permanent and often change your score very little. According to Experian, “A single hard inquiry will usually take fewer than five points off your FICO® score, with this score impact remaining for up to a year.
The effect of one hard pull can be negligible, but repeated hard credit pulls in a short period can damage your credit score because it can signify that you are utilizing new credit to manage your money. It should be noted that when making a purchase from a car dealer, if you agree to let them handle the credit service, they will “shotgun” your application to several lenders for approval. Multiple inquires of this type count as a single inquiry.
How Can I Improve My Credit?
As stated above, numerous factors determine what can affect your credit score. While there are fewer ways to raise or “fix” your credit score they are simple and can produce positive results.
According to the Consumer Financial Protection Bureau (CFPB), the best ways to improve your credit score include, making loan payments on time, staying away from your credit limit, applying only for credit you need and double checking your credit reports for mistakes.
While it’s impossible to fix your credit overnight you can get your credit journey started on the right foot by practicing smart and responsible borrowing and spending.
