Understanding Your Credit Score
Before we tackle reducing your debt, let’s take some time to talk about your credit score. It’s a three digit number, from 0 to 850, that indicates the chance that you’ll become careless in meeting your credit responsibilities (AKA repaying your debt) within the next two years.
What Is It, exactly?
Your credit score doesn’t only affect your credit card application. A potential landlord might check your credit report. Poor credit may cost you more for car insurance. Possible employers may consider your credit score as a sign of your dependability. Unless it is terrible, a poor credit score may not cause lenders to deny you, but you'll probably pay a higher interest rate than someone with a better credit score.
The Fair Isaac Corporation (FICO), is the most commonly known type of credit score. It is a measure of your past ability to pay and also anticipates your future ability to pay. The FICO credit score does not include your age, sex, race, religion or marital status. Your salary, occupation, where you live and employment history are also not factors that are considered.
A credit score somewhere between 720 and 850 will most likely capture you a top interest rate and any score under 640 may only get you a secured loan. Each of the national credit reporting companies (Equifax®, Experian®, and TransUnion®) must make available a free copy of your credit report, if you ask for one, once every 12 months.
Generally, negative information more than seven years from the date of your last action must be removed from your report.
What Makes Up My Credit Score?
Your payment history and how much you owe account for about 65% of your FICO score. Given less weight, but certainly important, are the length of your credit history, the type of credit used (revolving /installment), and any newly acquired credit.
Why Did My Credit Score Go Down?
Reason #1: You missed a payment on one of your credit accounts.
About 35% of your credit score reflects your payment history. An alarm sounds if you don’t pay one of those debts on time, even if you usually pay off all of your balances on time, just one late payment can hurt your credit score.
To avoid missing payments it’s a good idea to arrange automatic payments and email or text reminders on all of your accounts. Should you make a late payment, don’t stress. Just continue to make on-time payments on all your accounts, and your credit scores will start to improve.
Reason #2: Your use of credit went up.
This accounts for about 30% of your credit score and it is important because it gives potential creditors an idea of how conscientiously you use credit. Let’s say you have $20,000 of credit available and you have a balance very close to that limit. That may cause a drop in your score even if you make payments on time. Keeping your total credit use at or below 30% of your maximum available is a good idea. Anything higher might suggest careless credit behavior and could lower your credit score.
Here’s some ideas to reduce your credit use.
a. Decrease your spending!
b. Pay off some credit card debt.
c. Request a credit limit increase or open a new credit card.
Reason #3: You closed an old credit account or paid off a loan.
The length of your credit history accounts for about 20% of your credit score. By closing your oldest credit card account, you’re lowering the average age of your credit accounts. While it’s tempting to close an old account, having a good mix of different types of credit and open accounts can show lenders your[L1] responsibility in pay off debt. If your total number of accounts suddenly goes up or down, that could indicate that you’re financially strapped and need credit or can’t afford your existing credit accounts. Closing accounts does not make them go away. The history stays for this part of the credit score.
Reason #4: You recently applied for a new loan or credit card.
Applying for a new loan or credit card accounts for about 15% of your score. Financial institutions usually check your credit before making their decision. This check is known as a hard inquiry, and you usually have to authorize it.
A hard inquiry could reduce your credit score by a few points or it may have only a slight effect. A single hard inquiry isn’t something you should be concerned about. However, if you’ve applied for several accounts in a short period of time, you could appear anxious for credit, and the damage from those hard inquiries will add up. To avoid unnecessary inquiries, try to only apply for credit when you need (and can afford) it, and try to focus on cards that have a good chance of getting approved.