About Credit Scores
What is a credit score?
A credit score is a numerical value lenders use when assessing whether they are willing to extend credit to you. Lenders and financing companies take a variety of factors into consideration when making this decision, but a credit score gives them a fast, fairly objective indication of your credit risk. Your credit score is calculated based on both the positive and negative information found in your credit report. For more information, refer to the "Factors Affecting Your Credit" section.
What can your credit score do?
It is very useful to know your credit score when you: want to lower your interest rate; need to increase the credit limit on credit cards; purchase a car or home; or apply for loans, employment, or housing. Knowing your credit score will give you peace of mind so that when these things come your way, you won't be in the dark.
Factors Affecting Your Credit Score
Credit reference agencies compute your credit score based on information contained in your credit report, which is primarily broken down into the following five areas:
- Payment History - Generally, 35% of the calculation of your credit score comes from your payment history. All late payments, bankruptcies and other negative items will hurt your credit score. However, having a solid record of on-time payments will help your score.
- Amount Owed - Approximately 30% of your score is comprised of how much money you owe to your creditors, the number of accounts with outstanding balances and how much of your available credit has been used. The ratio of how much you owe with respect to your credit limits will play a part in determining your score. The more you owe compared to your available credit limits, the lower your credit score will be.
- Duration of Credit History - The length of your credit history impacts about 15% of your credit score's computation. This is why it is important to start building good credit as soon as you can.
- Recent Credit - Your most recently acquired credit will comprise roughly 10% of your credit score calculation. If you've recently applied for or opened new credit accounts, such activity will be reflected in your credit score.
- Additional Factors - The remaining 10% of your credit score calculation takes into account several other minor factors. In general, this will be a factor for people who have longer credit histories.
Why Your Credit Score Matters
Keeping up with your credit score is a crucial step to maintaining an excellent credit rating. Your credit score is a number that helps lenders and other important entities predict how likely you are to make your payments on time, and affects whether you can obtain credit.
Lenders look at your credit score at different times to determine changes in your interest rate, credit limit, or to decide on sending you an offer. Having an excellent or good credit rating can save you money on lower interest rates, and this is why it is an important part of your financial health.
Your credit score is very important. Don't wait until you are in a bind and need a higher credit score - now is the time to take action! Having a good credit score helps to ensure stability and security for you, and your family.
Credit Reference Agencies
It is a good idea for individuals to review their credit reports at least once per year in order to ensure that the reports are accurate. You can obtain a credit report from each of the three nationwide credit reference agencies: Equifax, Experian, and Callcredit.
Recommended places where you can get your score:
The price charged for your credit score will vary depending on what credit reference agency you choose.