Your credit score is a three-digit number that gauges your credit health at a point in time. Credit scores range from 300 to 850 with higher scores being better. Credit card companies use your credit score when they’re deciding to give you a credit card. Banks also use your credit score a basis for lending decisions. In both cases, your credit score impacts how much you pay for credit. The higher your credit score, the lower your interest rate will be. If you have a low credit score, you’ll typically receive higher interest rates and credit card applications may be denied.
Each consumer has several different credit scores. The credit score that’s most widely used by lenders is the FICO score. The FICO score was developed by FICO, which used to be called Fair Isaac. Then, you have a credit score from each of the three credit bureaus – Equifax, Experian, and TransUnion. Your credit score is based on information in your credit report – a document that includes information about your credit accounts.
Credit Score Factors
There are five key things that influence your credit score:
- Your payment history is 35% of your credit score. How you pay your credit cards and other bills has the most impact on your credit score. Paying your bills on time will raise your credit score. Late credit card payments bring your credit score down.
- Level of debt is 30% of your credit score. Your level of debt is measured using what’s known as your credit utilization ratio. The credit utilization ratio compares your total credit card balances to your total credit limits. The lower your ratio – meaning your credit card balances are low – the better.
- Age of credit history is 15% of your credit score. The longer it’s been since you opened your first and last credit accounts, the better. A longer credit age shows that you have more experience with handling credit, something that makes you more likely to pay your bills on time.
- Mix of credit is 10% of your credit score. This factor considers all the types of accounts you have. Having some open loans is good. Having loans and credit cards is better because it shows you’re able to manage different types of debt.
- Your recent applications for credit are 10% of your credit score. Each time you make an application for credit, the creditor (or lender) must take a look at your credit history. These applications can bring down your credit score, especially if you make several in a short period of time.
Using Credit Cards to Get a Good Score
Credit cards are one of several types of accounts that will be factored into your credit score. The way you handle credit cards can factor into each of the five credit score factors we talked about above.
Pay on time
Paying your credit card bill on time will raise your credit score, while late payments will cause your credit score to decrease. If your credit card goes beyond 90 days late, your credit score will be severely damaged. Letting your credit card get charged-off (which happens after 180 days of nonpayment) is one of the worst things for your credit score. The late payments will continue to impact your credit score for seven years, but won’t hurt as much as time passes and you add more positive payment history.
Keep balances low
Keeping your credit card balances low is good for your credit score. High credit card balances lower your credit score. It’s best to keep your balances below 20% of your credit limit. On a credit card with a $1,000 credit limit, your balance should never exceed $200. Maxing out your credit card is detrimental to your credit score, but the effect on your credit score will lessen as you pay your balance down.
Open a credit card account
Opening your first credit card account sooner rather than later will help grow your credit age. The longer your oldest account is the better. Since credit age is calculated as an average age of your credit accounts, opening new accounts can lower your credit age. Closing old accounts can also lower your credit age, but only after about 10 years when they’re no longer included in your credit report.
Mix up credit cards and loans
Having a credit card and a loan will help improve your credit score in terms of your mix of credit. Keeping only credit cards or only loans will cause you to lose points in this area.
Only make a few new applications
Minimizing your credit card applications will keep your credit inquiries low and your credit score higher. The more credit card applications you put in, the more your credit score drops. Inquiries only affect your credit score for a year, so if you apply for a credit card this year, you can apply for another one next year without making a significant impact on your credit score.
Checking Your Credit Score
You can purchase your credit score from MyFICO.com or from Equifax.com and Experian.com. The TransUnion website TrueCredit.com doesn’t have a single credit score product that you can purchase, but you can receive a free credit score if you purchase a three-in-one credit report.
CreditKarma.com offers a free credit score based on information in your TransUnion credit report. Free credit scores from TransUnion do not require an additional purchase.
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