Understanding Your Credit Score 101
It’s no secret that a large number of young adults know little about their credit scores. Secondary schools and higher education don’t always do enough to educate students on credit, budgets and other financial matters. While obsessing over your credit score isn’t recommended, understanding how credit scores work can help you figure out how to improve your credit health. A healthy credit sets you up for success later down the road when applying for a car loan, mortgage or even getting insurance quotes. Your credit score uses information from your credit report to assess how likely you are to repay debts in a timely manner. Understanding your credit score doesn’t have to be daunting! Read on for a brief, credit score 101:
- The three major credit-reporting agencies, Equifax, Experian and TransUnion, determine your risk for assuming debt based on your credit history. The result is your credit score.This 3-digit score is based on five factors, including payment history, the amounts you owe and the types of credit you’ve obtained. Personal information like income, occupation, age and marital status are not considered.
- You are legally entitled to one free credit report each year from each of the three credit reporting agencies. When you’re viewing your credit report, the action of receiving it is called a “pull.” Credit pulls are separated into hard pulls and soft pulls. Hard pulls affect your credit score, soft pulls do not. For example, applying for a car loan will result in a hard pull, whereas applying for a store credit card is a soft pull.
- It is important to check your report to protect against reporting mistakes and fraud. If you find something wrong on your credit report, you will find instructions for submitting disputes and contact information including a toll-free telephone number, Internet and mailing address. You may also be the victim of identity theft and not even know it! Check your report for unknown Social Security numbers and account numbers.
- There are many factors that play into your credit score. As mentioned earlier, payment history, types of credit and amount you owe play into your score, but there are many obscure factors you may not think about. These factors include: credit card utilization rate, percent of on-time payments, number of derogatory marks, age of open credit lines, number of open accounts and number of hard pulls.
- The best way to raise your credit score? Pay all of your obligations on time. Your payment history usually constitutes about 35% of your credit score. One late payment reported to a credit bureau can drop your score by 100 points, particularly if you had a high score. These late payments can remain on your credit report for seven years. Bankruptcies appear for even longer at a staggering 10 years!
Now that you know a little more about credit scores, you can better take care of those three little numbers that determine your financial life.
This content is made available by Mutual Savings Credit Union for informational purposes only. By using this content you understand that there is no intent to give financial investment, retirement planning or budgeting advice. This content should not be used as a substitute for competent advice from a licensed financial professional or a consultation with your licensed accountant.