Credit scores determine a lot about your financial situation. A good credit score can help you get approved for a home loan or help you rent your dream apartment. A bad score, on the other hand, can send your loan rates skyrocketing or put you in a nightmare apartment. Of course, chances are, you already know all that.
However, did you know that your credit score is impacted by the length of your credit history? Or that there’s a difference between a credit score and a credit report? Maybe not. While personal credit plays an important role in everyone’s life, not everyone fully understands their credit score and history.
The better you understand your score, the more you can do to improve it. Thankfully, a lot of what you need to know is right here. Below are seven things you might not know about personal credit, but definitely should.
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1. Your Score Is Based on Several Factors
Your credit score is one number, but that number is based on these five factors.
Payment History
This refers to whether you make your payments on time. Payment history is the most significant factor in calculating your credit score, constituting 35% of it.
Credit Utilization
Your credit utilization makes up 30% of your credit score, and it’s based on the percentage of available credit. Many financial experts recommend your credit utilization ratio should be less than 30%. This means that if you have a $2,000 credit limit, you should carry less than a $600 balance.
Credit Account History
Your credit account history makes up 15% of your credit score. The longer you keep an account open, and demonstrate you can make payments responsibly, the better off you are.
Credit Account Types
Having a mix of accounts open makes up 10% of your credit score. For example, a credit card is revolving credit—you can continue to borrow and pay it off in cycles. The other type is installment credit. Loans for single large purchases, like an auto loan, are examples of installment credit. Too much debt is never a good thing. However, having a mix of credit accounts, when handled responsibly, can boost your score.
New Credit
New credit determines 10% of your score. This includes how many open accounts you have, as well as how recently you opened those accounts. This category also encompasses credit inquiries—how often others check your credit.
2. You Don’t Have to Accrue Debt to Build Credit
As you’ve read above, credit card accounts and credit card payments can make a big impact on your credit score. However, that doesn’t mean you have to incur a lot of debt to use that category to your advantage. A credit card with a high limit and high interest rates might make you think otherwise. But a secured credit card has your back.
A secured credit card works much like a traditional credit card. However, your credit limit is the amount you put down as a cash deposit. This deposit means the bank doesn’t take on as much risk. Plus, you can rest assured that you won’t spend money that you don’t have.
Meanwhile, the bank that supplied the card will report on your payment history. So you can build your credit without actually using borrowed money.
3. There’s a Difference Between a Credit Score and a Credit Report
Your credit score and credit report go hand in hand, but they are different. Your credit score is the number determined by your credit report. The credit report comprises your credit history—basically your credit activity. For example, your payment history, both good and bad, will appear on your report. This information will then determine your score.
Both are often important to lenders. The credit score may be the first thing they look at, but many will also check your credit reports. This helps them get a better picture of your reliability, and helps them determine whether or not you’re creditworthy.
4. Employers Don’t Have Access to Your Credit Score
There’s a common misconception that potential employers can access your credit score when determining whether or not to hire you. That’s not true. Because of the Fair Credit Reporting Act (FCRA), employers can only check a modified version of your credit report. And to do that, the potential employer has to have your permission.
One reason employers pull that information is to get a better idea of whether or not you’re responsible. In other words, what they find might weigh into their hiring decision. So if your potential boss wants to check your report, make sure you’ve been making your loan payments on time.
5. You Should Check Your Credit
Contrary to popular belief, there’s no penalty for checking your own credit report. Also, your inquiry won’t show up on your credit report. What does show up, however, are any hard inquiries.
A hard inquiry is often done when you are trying to get a new line of credit. Another example of this is when a potential landlord pulls your credit. Hard inquiries can negatively impact your score. However, a soft inquiry, like when you check your credit, will not lower your score.
Regularly checking your credit report is crucial. You’ll have a better idea of your financial options if you keep track of your credit history. Plus, you’ll be able to catch any potential fraud. Be sure to review your credit every year. Then you can note any abnormalities, and report them before they have long term impacts.
6. Late Payments Might Not Be on Your Credit Report
You should try to avoid making late payments. However, many creditors will wait about 30 days to report that missing payment. If you pay it before then, your creditor might not report it to the credit bureaus at all. Keep in mind though, you’ll most likely still get stuck with a late fee.
Surprisingly, credit reporting is optional for most creditors. While banks usually send monthly reports, other creditors may not report on your payments at all. So while late payments may not show up on your report, on-time payments may not always show up there either.
7. A Good Credit Score Is 700
Credit scores generally range from 300 to 850. According to Experian, a credit score of 700 to 800 is considered good. Anything above an 800 is considered excellent. A bad score is usually somewhere between 300 to 579. According to research, 711 is the average FICO score for Americans.
A low credit score won’t always prevent you from getting a loan you need. However, you’ll most likely have high interest rates. The better the score, the better your options. That’s why it’s best to improve your score before you need to work with a lender.
Your personal credit greatly impacts your life, but an ideal credit score can seem hard to come by. Especially if you don’t know what a credit report is, or what determines your score. Once you have a better understanding of how credit works, you can use that knowledge to your advantage. The more you know about credit, the easier it is to improve it.
