First Person: What Influences My Credit Score?

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Knowing your credit score is an important part of maintaining financial health. I have been fortunate to get several car loans and purchase three properties throughout my adult life. Each time my credit score has been the most important factor in getting the loan and securing a low interest rate. At first I did not understand my credit score. It seemed like an arbitrary number. I knew that this couldn't be the case. Currently, I need to purchase a vehicle. This will probably involve a loan from a financial institution. Before applying, I decided to learn more about credit scores in order to make sure I qualify and can secure a favorable interest rate.

Everyone using credit has a FICO score. FICO scores are a rank between 300 and 850 which determines your risk to creditors and overall financial health. These scores are created through the monitoring by Fair Issac Corporation and the three main credit bureaus; Equifax, Experian and TransUnion. Every business that extends credit uses one of those reporting agencies to determine credit worthiness. The higher a credit score you have makes you appear to be a lower credit risk. Individuals with high credit scores obtain loans easier and at a favorable interest rate.

How are credit scores calculated?

Over a third of your credit score is based on payment history. If you have paid on-time and as agreed on accounts, the score will be higher. Missing payment deadlines will lower your credit score. Before learning about how much on time payments made on credit reporting, I admit I was relaxed about payment deadlines. It did not matter much to me if something was late. Now it matters to me. Financial judgments against you, such as bankruptcy or liens, will negatively impact the total credit ranking. They are long lasting scars on credit history. Bankruptcy negatively impacts credit scores for seven years. This can make obtaining credit difficult.

Nearly a third of your credit score is determined by how much credit you have available and how much money is owed on that credit. Ideally, no more than 30% of available credit lines should be used at any time. For example: If you have $10,000 of credit with $2,500 charged on it, you are only using 25% of available credit. That will get a higher ranking. If you have $10,000 of credit with $6,000 charged on it, you are using 60% of available credit. This will lower your ranking. Learning this, I have increased the priority of paying down my outstanding debts.

Twenty five percent of the credit score is time-based. New credit accounts for 10% of the total score. It surprised me to learn that new credit does not just include newly opened credit, but inquiries into your credit score. Every time a lender makes an inquiry it will temporarily lower your credit score. Think about this before applying for multiple credit cards and loans. The additional 15% is determined by how long your credit account has been opened and how long since it was last used. To maintain an active credit account, I try to use credit cards at least once every six months.

The final piece of the credit score puzzle is the types of credit used. This represents the final 10% of your credit score. It looks at the types of debt owed. Credit cards, mortgage loans, installment loans and other lending are viewed. The balances and current activity on each of the types of credit are used to determine the individual ranking.

By understanding how the credit score works, it is easier to take control of your financial life. By understanding the factors that make up the credit score, actions can be taken to improve your overall ranking. Being aware of the toll late payments make adjusted my priorities. It became very important that bills are paid on time. A second priority is paying down some debts owed to have a larger percentage of available credit. These positive actions have increased my credit score. When it becomes time for the car loan, I am confident that I will not only qualify, but get a great interest rate.

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