Credit Score

What is it and how is it affecting you?

What is a credit score?

A credit score is number that represents a person’s creditworthiness that is based on their credit history.

- Between 300 and 850, depending on the scale used.

- The higher a person’s credit score is, the more likely a person is to repay a loan

- As credit scores decline, the risk a lender is taking when loaning money increases.

The credit score replaced reports, making it more objective and easier for lenders.

Who cares about credit score?

What affects your credit score?

Payment history- Paying off what you owe each month will help you keep a high credit score. If you miss a payment every once in a while it doesn't hurt your credit score as much as it used to. Payment history makes up 35% of your credit score.

Foreclosure definitely hurts your credit score but having months of that late payments has a negative affect as well.

Amount borrowed compared to available credit- Ideally you want to borrow less than 33% of your available limit each month (For example, if you have a credit card with a $300 limit, you want to spend and then repay no more than$100 each month on that card). Emergencies happen, but try not to borrow more than 50% of your available balance whenever possible. Try not to carry a balance on a credit card over several months, but to pay it off ASAP. Its better to owe a small amount on several cards than it is to max out one card to its limit. This accounts for roughly 30% of credit score.

Length of credit history- You can raise your credit score by keeping accounts open for over 7 years. Every time you open or close an account, your score is affected, for this reason, it's better to keep a long-standing credit card open and use it very little than to pay it off and close the account. This can affect around15% of your credit score.

Inquiries and new debt- Every time you apply for a new credit card or loan your is slightly lowered. To keep this damage minimal, when you are applying for a loan from different lenders in order to find the best deal, you should do so within a short time period. This is because mortgage inquiries within 30 days of one another will be grouped as 1 inquiry (for cars the limit is 14 days). This affects about 10% of your overall score.

Type of debt- Affects around 10% of your credit score.

Installment loans, such as car loans or mortgages, are looked at more favorably than revolving debt. This is because there is a set amount that will be paid to the lender each month, while revolving debt is based on how much of your credit limit that you use and is therefore flexible. However, successfully managing multiple types of debt; a mortgage, car loan, and credit cards, can help to boost your credit score.

By Mackenzie and Erin