You have credit score questions. I hope to address 10 of the most common score related questions in this article. A credit score isn’t a difficult concept to grasp but there are nuances that can create confusion. If you’ve pulled your credit report and access your free credit score, I’m sure you’re wondering how in the high heavens were these scores calculated. Yes, I said “high heavens” because at one time I thought it would take a miracle for me to understand.
Fortunately, the creators of these scoring algorithms have provided some details. Basically, your score is based on categories or factors. They include credit utilization, payment history, length of credit, types of credit, and credit inquiries.
Your credit score is a reflection of how you’ve handled other people’s money (i.e. credit cards and loans). Credit scoring models are complex and vary among creditors. If a credit score factor changes, your score might change — but improvement generally depends on other factors too.
Nevertheless, scoring models usually consider the following types of information in your credit report to help compute your credit score. Here are credit score related questions to ask yourself:
Have you paid your bills on time?
Your payment history is a significant factor. A credit report that reflects one 30-day delinquency can drop your credit scores significantly. By how many points? We can’t truly know. What we do know is that payment history is 35% of your score. Having many late payments can weigh down your scores and make improving them a bit longer.
Are your credit cards maxed out?
The amount of revolving credit is 30% of your credit score. It’s what’s referred to as credit utilization. Credit card balances that are near or at the credit limit are hurting your scores. There’s a generally accepted recommendation: keep your balances below 30% of your limit. If you have to keep a balance, then follow the recommendation. However, my suggestion is to pay off credit card balances in full. You don’t need to carry a balance.
How long have you had credit?
The longer you’ve had credit the stronger your score can be. Basically, a lengthy credit history gives the scoring algorithms more data to use that can predict the likelihood of default or bankruptcy. Fifteen percent of your FICO score uses length to calculate scores. It’s beneficial to start your credit history sooner, but that doesn’t mean accumulating debt or holding onto it for extended periods of time.
Have you applied for new credit lately?
Credit applications are also used to calculate your scores. Applying for credit is considered a credit inquiry and is factored into your score. Too many inquiries can negatively impact your credit. There’s a difference between soft and hard inquiries where hard hits mean you applied for credit (and may or may not have been approved). There are exceptions to this rule concerning shopping for auto loans and mortgages. The algorithms understand you’re looking for the best rates and need to apply to a few lenders. The scoring models may lump hard inquiries of this type as one when occurring within a short timeframe.
How many and what types of accounts are reported?
If it wasn’t any more confusing, scores factor in the mixture of accounts. Basically, they want to see different types of credit such as credit cards, loans, mortgages, etc. The more variety the better their models can predict your credit use future. With too many of the same types of credit, your score is impacted by 5%.
Do you have any outstanding uncollected debt?
Credit reports that show public liens and collections can impact your score and ability to get credit in the future. It’s important you verify these records, settle or dispute the collections.
Do you have a bankruptcy reported?
Bankruptcy is a legal protection that some have used to relieve the pressure of insurmountable debt. It’s important to understand, bankruptcy isn’t an end but a beginning. It’s an opportunity to renew. Bankruptcy is reported for 7 to 10 years depending on the Chapter that was filed. During that time, it will show on your report and impact your score. However, you can begin to reestablish your credit with a secured credit card or secured loan. Check with a credit union or using a credit builder loan.
What can you do to stay on top of your credit?
There are two things you can do:
- Check your credit report. Request annually through AnnualCreditReport.com. This is the federally mandated website where you can access your credit score for free from all three credit bureaus. Learn more about the free annual reports.
- Use a free credit monitoring app with free credit scores. I recommend looking at CreditKarma that offers both of these for its members for free. They offer credit report cards and free scores from 2 bureaus. Read the CreditKarma review.
What happens if you have incorrect information on the reports?
Dispute the inaccuracies directly with the credit bureau. It’s important you review your credit report at least annually, but having alerts set up with a credit monitoring service can be helpful in discovering these inaccuracies earlier.
What can you do to establish or rebuild your credit?
To establish credit, you’ll need to get credit reported. There are a number of ways to do this. You can get a secured credit card through a credit union or use a credit builder loan. Self is one such service that offers a unique way of saving money while making payments that’s reported to all three credit bureaus. The service can help those looking to establish or rebuild their credit.
Do you have any credit score questions not reflected in this article?