Why Is My Credit Score Important?
Your credit score is an indicator of your credit worthiness. Whether getting a loan, buying a home or car, or even applying for a credit card, it’s important to know where you stand.
Get your Equifax Credit Report and Score™ for $15.95.
Click here to see important disclosures about scores
What Is A Credit Score?
A credit score is a three-digit number. Credit scores range from 280 to 850, which credit bureaus calculate based on information in your credit report. It is a simple, numeric expression of your credit worthiness. A good credit score is typically 660 or higher (very good is above 725; excellent is above 760). Although the three credit reporting bureaus (Equifax, Experian, and Trans Union), use similar methods to determine a credit score, the formulas they use are not exactly the same and your credit score will vary from bureau to bureau.
Credit scores play an important role in today’s digital economy. The interest rate you get on a home or car loan, for example, is determined by your credit score. Also, when you apply for a credit card or a charge card at a retailer, the answer depends largely on your score. You should regularly check your credit score.
The main factors involved in calculating your credit score are:
- The number of accounts you have;
- The types of accounts;
- Your available credit;
- The length of your credit history;
- Your payment history.
The bureaus do not seek out information about you – information is reported to them. Banks, credit card companies, retailers, and others, report the amount you owe, your total allowable credit, and the payments you make. Late payments obviously count against you. If you have maxed out your credit cards, that counts against you, too.
You are entitled to order your credit report from each agency once every year. You can obtain the reports through annualcreditreport.com.
You are entitled to order
your credit report from each
agency once every year.
After you have ordered your free credit report(s) you can also get your credit score (it is not included in your credit report), for a small fee (about $9). If you want to keep track of your score on an on-going basis, you can sign up for a credit monitoring service, which will alert you whenever there is a change to your score.
You should check your credit report regularly to make sure there is no inaccurate or erroneous information in it. If you find information that is wrong, you should immediately file a dispute with the credit agency.
Remember, negative information only stays on your credit report for a fixed period of time – approximately seven years – so improving payment habits will improve your credit score over time.
How is My Credit Score Calculated?
Your credit score is calculated based on a number of factors in your credit history, including the number and type of credit accounts you have, the amount of available credit, the length of your credit history and how you have paid your bills. Each of these factors is assigned a numerical value, and then weighted to determine your credit score.
Each of the credit reporting bureaus weight these factors differently, but they generally follow this breakdown:
Your credit history includes information about how you have repaid the credit you have already been extended through credit cards, lines of credit, retail department store accounts, installment loans, auto loans, student loans, finance company accounts, home equity loans and mortgage loans for primary, secondary, vacation and investment properties. Your payment history is a key determinant of your credit score.
In addition to reporting the number and type of credit accounts that you’ve paid on time, this category also includes details on late or missed payments, public record items and collection information. The credit bureaus look at how late your payments were, how much was owed, and how recently and how often you missed a payment. Your credit history will also detail how many of your credit accounts are delinquent in relation to all of your accounts on file. So, if you have 10 credit accounts (known as “tradelines” in the credit industry), and you’ve had a late payment in 5 of those accounts, that ratio may impact your credit score.
Your payment history also includes details on public record and collection items, including bankruptcies, foreclosures, wage attachments, liens, judgments and any delinquencies that have been reported to collection agencies.
Your credit score will take all of this information into account, which is why the payment history section account may have the biggest impact in determining your credit score.
This section of your credit score analyzes how much money you owe on your various credit accounts (known as “tradelines”) and whether you’re showing a balance on a particular account. It also reflects the total number of credit accounts you’re currently carrying with balances. So if you own three credit cards, each with balances on them, that will affect your credit score.
Another part of the “amounts owed” category is the total credit line. This is the maximum credit limit you could charge against a particular credit account, say $2,500 on a credit card. A key part of your credit score analyzes how much of the total credit line is being used on your credit cards and any other revolving lines of credit. (A “revolving” line of credit is one where the balance may change monthly depending on how much you charge and pay and the interest rate carried on the account.)
Your credit score also shows how much of any installment loans you carry is owed compared with the original amount. (An “installment” loan is one where you have a fixed number of payments and the amount of the payment is fixed, like a car loan.)
The ratio of used credit (your balance) to maximum available credit (your total credit line) affects your credit score. Creditors like to see this ratio stay low because it tells them you are in control of your credit.
Your credit score reflects the different types of credit accounts, or “trade lines,” you have, including revolving debt (such as credit cards) and installment loans (such as mortgages, home equity loans, auto loans, student loans and personal loans).
The other key factor is how many of each type of trade line you have. Creditors like to see that you’re able to manage multiple trade lines of different types and the credit score algorithm reflects this.
Your credit score also reflects how many new credit accounts you have opened compared with the total number of “trade lines” in your credit file. Your score takes into account how many recent requests for credit you have initiated, as indicated by inquiries by creditors to credit reporting companies. (These inquiries are known in industry jargon as “hard pulls,” of your credit.)
Your credit score does not take into account requests a creditor has made for your credit file or score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your own request for a copy of your credit history (known as “soft pulls” of your credit).
Your credit score will factor in the length of time since creditors made credit file inquiries.
This section of your credit history details how long your credit accounts have been established. The credit score calculation includes both how long your oldest and most recent accounts have been open. In general, creditors like to see that you’ve been able to properly manage credit accounts over a period of time.
Your credit score will analyze how long different types of accounts have been established, how recently each credit account has been used, and whether there has been a judgment or public record item listed on your credit history.
How Do My Actions Impact
My Credit Score?
The good news is that no matter where your credit score is today, there are a number of different steps you can take now that can change your credit history and help impact your credit score. You should take all the steps you can to help establish a good credit score.
Obtain your credit history and check for the following:
Are there any factual errors? If there are, you’ll need to dispute them with the credit reporting bureau. (See How Do I Dispute An Error on My Credit History?)
Have I made any late payments? It’s important to pay every bill on time. Even one late payment can affect your credit score for up to two years.
The most important thing
you can do to improve your
credit score is to pay every
bill on time.
How many credit accounts or “trade lines” do I have? If you have too many different credit accounts, it could negatively affect your credit score.
How many new credit accounts have I opened? Be mindful of opening too many accounts at once. Too many inquiries by prospective creditors in a short period of time may negatively affect your credit score.
How old are my credit accounts? The longer you have had a credit account open and active, the more likely it will help stabilize your credit history and positively impact your credit score.
Do I have enough different types of credit accounts? Ideally, you will have at least four trade lines of different types, such as credit cards, student loans, a mortgage or home equity line of credit or perhaps an auto loan.
Are my balances too high relative to my total available credit limit? Creditors prefer to see a lower ratio of how much debt you’re carrying compared with how much available credit you have on a particular account. Ideally, you’ll use less than 35% of the total credit limit on any particular account. For example, if your credit card has a maximum credit limit of $1,000, carrying a balance above $350 on that card could negatively affect your credit score.
Do I have any judgments, liens, foreclosures, bankruptcies, short sales or delinquencies that have been reported to creditors? Having this sort of information on your credit history is extremely damaging to your credit score. If you have gone through a reversal of fortune, and had to file for bankruptcy or completed a foreclosure, your credit score will reflect this negative information for several years.
The most important thing you can do to positively impact your credit score is to pay every bill on time.
How Do I Check my Credit Score?
You can purchase a copy of your Equifax credit score by clicking here. Because each credit-reporting bureau places a slightly different emphasis on various parts of your credit history, it’s worth taking a look at each bureau’s version of your credit score. You can buy a 3-in-1 package of credit scores here.
Get your Equifax Credit Report and Score™ for $15.95.
Click here to see important disclosures about scores
Why Should I Check my Credit History and Credit Score?
In today’s digital economy, your credit history and credit score are vital pieces of information that are key to helping you secure your financial life. Credit card companies, mortgage lenders, and insurance companies will pull copies of your credit report and score in order to decide whether to extend credit or how much to charge for your insurance premium.
Financial services companies tend to group borrowers into segments according to their credit score. These credit score ranges may determine how much you’ll be charged for your insurance coverage or the interest rate you pay on your mortgage, student or car loan or the type of credit card you’ll be offered.
In general, Equifax’s credit score ranges from 280 to 850.
The formula, which is based on the FICO® credit-scoring model, breaks down as follows:
Fico® Credit Scoring Model
Typically, if your credit score falls in the uppermost range, most lenders and creditors will consider you to be an excellent credit risk, and may extend the best credit offers to you. If your score is in the lowest range, it may be extremely difficult for you to obtain a loan on any terms whatsoever.
You should check your credit history and credit score regularly, so that you know where you stand before you apply for a credit card, a car or home loan or even auto insurance. That way, you can decide whether to pursue a credit application now or wait until your credit history and credit score improve.