A Beginner’s Guide to Credit Score Basics

If you understand credit score basics you will be on your way to a better financial future. Perhaps the first time you understand your credit score is when you apply for a car, personal, or mortgage loan. Your credit score also has an impact on other credit matters including what you pay for interest on your credit cards, how easy or difficult it is for you to rent a home, and what you may pay for a premium on your insurance. Additionally, a low credit score could also impact your work, particularly if you have a job that involves dealing with other people’s money. Therefore, it is critical every one of us understand credit score basics.

The Myth of a Single Credit Score

One of the most important things a consumer should understand is there is no single credit score. While a FICO (Fair Isaac Corporation) is the most commonly spoken about, there are other scores including Vantage. Individually, some credit reporting agencies use their own models when establishing credit scores as well. This means consumers may have different scores which are used in different ways, depending on the inquiry.

How Credit Scores are Created

When a credit score is generated, it is based on several factors. Consumers have some degree of control over their credit score since their actions, specifically how they handle their credit, is a major factor in their credit scores. When understanding credit score basics, you should take these factors into consideration to keep your credit score in the “good” to “excellent” range:

  • Timely payments – most consumers remain aware the better their history of paying their debts on time, the higher their credit score will be. This is one of the first things you become aware of as you know more about credit score basics.
  • Smart credit usage – if you are constantly using every dollar of available credit, your credit score will be lower than if you are using only a small portion of available credit. In most cases, creditors like to see consumers using less than 40 percent of their available credit.
  • Impact of experience – if your credit lines are all new, your credit score will be lower than if you have had some credit lines opened for longer periods of time. Creditors want to see that you have developed a pattern of responsibly using credit which can only be determined if you have had them for longer periods of time.
  • Credit line types – consumers who only have credit cards may have a lower score than those who have had car loans, mortgage loans, and student loans along with their credit cards. While this factor does not weigh heavily into your credit score calculation, it is still a consideration and something to think about when trying to understand credit score basics.
  • Recent credit inquiries – each time you apply for a new loan or a new credit card, it results in a “hard” credit inquiry. This type of activity will lower your credit score, although not significantly and not for long periods of time. The reason this is important is because if you are applying for several new lines of credit, it could signal you are about to face some type of financial challenge.

Closing Credit Cards and Your Credit Score

Some consumers who think they understand credit score basics think they can increase their credit score by closing credit cards. The fact is, while this may have a temporary impact on your credit score, in some cases, it could result in your credit score being lowered. The reason for this is more straightforward than you might think — if you close a credit card account you have had for a long period of time, then your “experience with credit” takes a hit. Consumers should take this into consideration when evaluating ways to increase their credit score.

Late Payments and Credit Score Impact

Many consumers think a single late payment does not have a long-lasting impact on their credit scores. This is true in some cases, although a 90-day late payment will remain on your credit report for up to seven years. One 30-day or 60-day late payment may not have a lasting impact on your credit score unless it is repeated on a regular basis. Fortunately, many credit card companies today are willing to adjust payment due dates to suit consumers. Therefore, if you find you are facing challenges meeting your payment date, it is a good idea to reach out to your creditors.

Rebuilding damaged credit scores can be challenging for consumers. Keep in mind, one of the most important things you should understand about credit score basics is your score can have an impact on more than just your finances. Consumers should check their credit reports at least one time per year and dispute any inaccurate information. This single step will prevent long-lasting damage to your credit score and make it easier for you should you decide to apply for a car loan or a home mortgage loan. Keeping your credit score as high as possible does not have to be difficult, as long as you have a firm understanding of credit score basics.

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