Everyone knows that, as adults, we should maintain good credit scores. However, many of us don’t really understand our credit scores, how it works, or what we need to do to maintain a healthy credit rating. There is a lot to know when it comes to your credit score. The guide below will break all the complications down into five simple facts you need to understand. Here are 5 things you need to know about your credit score.
1. Your Credit Score is Determined by Five Key Factors
Your credit score is a number that sums up your credit history. It is based on five key factors:
- Payment history – timeliness of your payments. Late payments negatively impact your credit score.
- Credit utilization – what percentage of your total credit limit you’re using.
- Age of credit accounts – the older your credit accounts are, the better.
- Types of accounts – regular payments on certain types of credit accounts (credit card, auto loan, no-interest loans and the like) let a lender know you’re responsible with credit and are willing to pay it back on time.
- Inquiries – Every time a lender checks your credit score, it negatively impacts it. This is because lenders get nervous when you apply for multiple lines of credit at once.
2. Your Credit Report and Credit Score are Not the Same Thing
As stated earlier, your credit score is a number that sums up your credit history. Your credit report is the history of your credit itself. When lenders consider you for a loan, they usually only look at your credit score. This is why you must check your credit report from time to time to make sure there are no discrepancies on it. This could cause a lower credit score than you deserve.
3. Checking Your Credit Score Yourself Does Not Negatively Impact It
Too many hard inquiries by lenders can cause your credit score to drop a point or two. When you check your credit score it doesn’t even show up as an inquiry at all. Feel free to check it regularly.
Furthermore, the impact of hard inquiries is minimal and temporary. There is some leeway to apply for the same type of loan multiple times within a short period. This allows you to shop around for the best deal on an auto loan or the like without worry that it’ll negatively affect your credit score.
4. A Lower Credit Score Can Cost You Big Over Your Lifetime
The rule of thumb in most cases is the lower your credit score, the higher the interest rate you’ll pay on a loan. This could end up costing you thousands more than if you had a higher credit rating. Raising your credit score by just a few points can save you a ton of cash and make you more eligible for credit in the future.
It’s important to note here that negative marks on your credit report eventually fall off. So, if you’re working hard to build better credit, you can rest assured knowing that as long as you keep working to build a strong credit rating, those negative marks will eventually go away as if they never existed.
5. Joint Credit Scores are Not a Thing
Credit scores are individual, so if you’re married or sharing a line of credit with someone else, both parties have separate credit histories and credit scores. That being said, if you are applying for a loan with another person, the lender may average both credit scores to determine whether they will approve or deny the application.
5 Things You Need To Know About Your Credit Score – Summary
Credit makes the world go round, so you must maintain a good credit score. Hopefully, the information above helps you understand your credit score a little better. Now you can do what it takes to keep your credit in good standing!
For more articles like this one, visit the financial planning section of our site.
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