Credit scores

Learnin' the Basics of Your Credit Score

Words by Abbie Dyer on Apr 2, 2015 10:00:00 AM

Your credit score plays a huge role in your financial life. It helps lenders determine how much money to give you and at what interest rate. So how do credit-reporting agencies come up with this magical number? And what makes up a credit score?

Take a second to consider this: A car needs regular maintenance if you want it to be reliable and last a long time. Without the occasional check-up and repair, you could get stuck in the middle of nowhere. Similarly, you don't want to get caught in a bad financial situation. To get the loans you want at a decent rate, just take the time to monitor and maintain your credit score.

 

The Basics of Your Credit Score

So what things make up a credit score?

  • Number of on time loan payments
  • Amount of credit used 
  • Type of credit you have available
  • How long you've had a line of credit
  • Total balance of debt
  • Recent credit behavior and inquiries
  • Available credit

Your VantageScore 3.0 credit score ranges anywhere from 300-850. This score helps lenders predict how likely you are to default on a loan. When you have a score close to 850, you show lenders that you're not a risky borrower and you know how to handle credit. If your score is closer to 300, lenders might hesitate to give you a loan because you're a higher risk.

 

Credit Card Impact on Your Score

Credit cards are a great way to build your credit score, but only if you use them right. Your score is built by the length of time you've had a card and how many on time payments you've made. Contrary to what many people believe, paying off your card in full each month doesn't have a big impact on your score. Just know that if you don't pay it off every month, you'll be charged interest so try to keep your balances as low as you can. Low balances show lenders that you have more borrowing potential.

In most circumstances, closing a credit card will not help your credit score. It might lower it because then you'll have less available credit. Think of it this way: The lower your balance + The higher your limit = A better credit score

When you close an account, it's not removed from your report right away and sometimes it takes years before it's gone. The bigger and more diverse your credit file is, the less of an impact closing a card will have on your score. For example, if you have five credit cards, a mortgage, and a home equity loan, your score will not go down as much as someone who only has two credit cards and closes one.

 

Check Your Report

We know that you want your number to go up, so the first step to making this improvement is checking your credit report. You're allowed one free copy of your credit report from each agency every 12 months. It's a good idea to go through this report each year to look for errors and to see where you can make improvements. Report any errors to the credit bureau immediately so the mistakes can be corrected. Checking your report is also a great way to combat identity theft.

Credit-reporting agencies are required to provide you with a free report but not a free score. 

 

SEE ALSO: 6 Reasons to Love Your Credit Card   |   Factors That Affect Your Credit Score

Topics: Credit scores

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