Your Top 10 Credit Questions Answered
Have you ever wondered how a lender decides whether to approve your credit application? Creditors use a credit scoring system to determine if you’re a strong candidate for credit cards, auto loans, or mortgages. Today, businesses such as insurance and phone companies are using your credit score to decide whether they can issue you a policy or provide you with service. A higher credit score shows to lenders and companies that you’re financially responsible, which means you’re more likely to get approved for credit or insurance and pay less for it.
Here are ten of the most common questions we receive on credit scores.
1. What is credit?
Credit is your reputation as a borrower. It's the ability to obtain a product or service with the agreement to repay the lender over time. Typically, you need a credit score to borrow money or get a product or service using your credit. There are several different credit scoring models that determine your credit score. For example, FICO® Score, VantageScore®, and lender-based scores. The FICO® score is a more commonly used score by lenders and financial institutions.
2. Why is credit important?
Having access to credit makes life possible (or at least helps). It allows you to purchase things you need or want such as cars and homes (when you don't have the cash to pay for it all at once) while breaking up the cost into smaller payments.
3. How could you use credit?
If an emergency comes up or you need something you can’t afford, having credit to borrow will allow you to purchase what you need as soon as possible.
As you borrow money and make payments on these accounts, creditors are reporting to agencies that you make your payments on time. The three major credit reporting agencies are Experian™ , Equifax®, and TransUnion®. Among other things, how you use credit and payment history information are collected and analyzed to form your credit score. The reports and scores are used to determine if you are eligible to receive credit. Your score also impacts the interest rate and terms of a loan or credit.
4. Why is a good credit score important?
Having good credit can impact several factors of your life such as, where you live, what you drive, your ability to get a job, the interest rate you pay, and if you are required to make a deposit for utilities. (Read more tips on establishing good credit.)
5. How is your score calculated?
Your score is calculated by taking all the information in your credit report and placing a numerical value to it. It’s broken down into categories and each one influences a different percentage of your score. The categories and percentages are payment history 35%, how much you owe 30%, length of credit history 15%, type of accounts 10%, and new credit 10%.
6. What is a good credit score?
Credit scores range from 300-850. Depending on which scoring method is used, your score will fluctuate. Generally speaking, scores of 670-739 are considered good; scores of 740 to 799 are considered very good, and 800 and higher are considered excellent. Higher credit scores mean you have shown you managed your credit responsibly in the past. Higher credit scores may make potential lenders and creditors more confident when evaluating your application for credit.
7. Does my credit report contain information that is not related to credit?
Your credit report also keeps a record of personal information such as public records, your current and former addresses, names, and employers. You may notice that older information sticks around on your credit score. After new information such, as a new address, is added your old data will stick around to act as additional identifying information.
8. What personal details do not affect my credit score?
Your credit score is a representation of how you manage your finances. It also is a representation of how long you have had credit. Things such as age, ethnicity, religion, and marital status are not included in your score. Your employer, salary, and occupation are also not included in the equation.
9. How long does negative information stay on your credit report?
For the most part, any negative information on your credit report can fall off after seven years, or ten if you’ve been through a bankruptcy. Positive information, for accounts like mortgages and car loans, remains on your report for an average of ten years from the day the account is closed. For revolving accounts, such as credit cards, your positive history will stay on your report for as long as the account is active.
10. How could I improve my score?
- Pay your bills on time. The biggest factor lenders look at is your payment history. Paying on time, every time shows that you’re reliable and should boost your credit score.
- Pay down your debt. The amount you owe plays an impact on your score. Pay down your current debt to increase your score. Lenders want to see that you’re not borrowing more than you can afford to pay back.
- Diversify credit. Lenders like to see a mix of different types of credit accounts. Such as revolving credit accounts like credit cards and installment loans, like mortgages, auto loans, and student loans.
For more tips on how to improve your score, check out our 5 Tips for Establishing Good Credit.
These are just some of the questions we receive, for more information on understanding your credit score or credit report check out our article Understanding Your Credit Report.