Are You Keeping Score?
In the name of American tradition, keeping score is a core focus in sports. We grow up in competitive environments, learning to navigate the wins and losses. While our credit score has nothing to do with our latest batting average, it does identify how we performed in managing our credit. Understanding your credit score is essential to managing your financial wellbeing.
What is a credit score and how do lenders use them?
Your credit score can determine if you’re approved for a loan, your interest rate, and in some cases, insurance coverage. It is a number based on a formula evaluating information in your credit report. While lenders forecast how likely you are to pay your bills and assess risk, banks analyze your credit score to determine eligibility for lending options.
Your credit score impacts other aspects of life beyond obtaining a loan, line of credit, or credit card. It can play a role in whether you land (and keep) a job, impact getting a cell phone, setting up utility accounts, paying for insurance, and renting an apartment.
Factors that influence your credit score:
- Total debt
- Types of accounts
- Number of open accounts
- Number of late payments
- The age of your accounts
Factors that do not influence your credit score:
- Debt to income
- Lien position
- Loan to value on property
There are several factors that can have a negative impact on your credit score. These include late payments (sometimes only one late payments can have significant impact), not paying your bills on time, canceling/closing debt, co-signing credit applications, and applying for more credit too frequently.
Credit applications show up on your credit report as credit inquiries. Too many credit inquiries can negatively impact your credit score, but it’s uncertain how many may be too much. Even though inquiries might be reported negatively on your credit report, banks may not rate it with the same weight when considering new credit options.
Suppressing the need to sign up for new credit offers is the best approach to maintaining a healthy amount of credit inquires. An easy trap to acquiring more credit than needed are through department store offers in exchange for a discount or taking advantage of marketing promotions offered by companies like car dealerships.
Above all, paying your bills on time each month is the most important. “To build or maintain a good credit score, it’s very important to pay your bills on time. It only takes a couple late payments to impact your credit score,” Mark A. Kappeler, Vice President of Retail Lending at NexTier Bank said.
Educate yourself about your credit score and watch how it fluctuates. You can use a free service to pull your credit score for insight, without having a negative impact. Free credit report services can be intuitive but may not be a true portrayal of your ability to obtain a loan. It always depends on which credit repository the bank uses. The most well-known credit repositories are Equifax, TransUnion, and Experian.
You are eligible for a yearly free credit report through the federal government at www.annualcreditreport.com. Depending on the services you select, a small fee may be required. You are entitled to one copy of your credit score from each repository once a year. Monitoring your credit is important, if nothing else to catch things like identify theft. Keeping on top of your credit report gives you peace of mind and puts you in control.
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