Making Sense of Your Credit Score

Your credit score just may be the most important three-digit number in your life. A good credit score will help you get the best possible interest rate on car loans, mortgages and other financial products, while a poor credit score can jeopardize your chances of getting a loan, car insurance or even a job.

Lenders routinely look at the information in your credit file and review your credit score, and so do employers and insurers. Reviewing your own credit profile and credit score can make managing your financial life easier.

As part of the review, you need to understand what goes into your credit score. The credit score is derived from the information in your credit file, and that credit history includes the following elements:

  • Payment history – How you pay your bills is obviously important to anyone lending you money. Your credit score will get a boost if you consistently pay your bills on time, and it will surely take a hit if you miss a payment or pay late.
  • Age – It can take some time to build up a comprehensive credit profile. As a result, young people often have lower credit scores than their older counterparts. The best thing you can do to overcome the problem is to pay your bills on time. Opening up a credit card account or taking out a loan can help you get a head start on building your credit history and boosting your credit score.
  • The Percentage of Total Credit You Owe – When calculating your credit score, the reporting agency will look carefully at the total amount of outstanding credit you have available, as well as how much you owe. All else being equal, an individual with total balances of $1,000 and total credit of $50,000 will have a better credit score than someone who owes $10,000 against $50,000 in total available credit.
  • Recent credit inquiries and behavior – Applying for new credit can adversely impact your credit score. Applying for a single new credit card will probably not have much of an effect, but filling out 10 credit card applications in a short period of time surely will. A recent history of missed or late payments can also sink your credit score.

Understanding the elements that make up your credit score can make managing your finances easier. Once you know that credit reporting agencies look at your total outstanding debt, you can work toward reducing that debt and the resulting credit-to-debt ratio. If you know that paying your bills on time factors heavily into your credit score, you can set reminders for each bill or make the payments automatically. Taking a few simple steps can boost your credit score and make getting your next loan a lot less painful.

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