Your credit score reflects your potential for future credit risk, aka “creditworthiness,” based on your past credit behavior. A mathematical algorithm takes the behaviors recorded in your credit report and generates your score into a three-digit number, which can range from 850 (“excellent credit”) to 350 (“bad credit”). But what exactly affects your credit score?
One of the most influential components of your score is your payment history, which incorporates information like late and on-time payments, bankruptcies, and liens. The later the payment, the more your score suffers. Another major factor is the amount you owe on your accounts, and what ratio of your available credit you’ve used. The length of time you’ve opened and used credit accounts also plays into your rating (longer is better). The types of credit you are using is also taken into consideration, as well as whether or not you have taken out any new credit recently. Personal and demographic information, such as race, income, and employment, do not affect your score.
Credit developers do not release their exact points for deductions, but do be aware that “hard inquiries,” which is when a lender requests a credit report on you to determine your worthiness for an auto loan, student loan, a new credit card, mortgage, etc., tend to affect your score negatively. Watch out for taking out too many of these in a close timeframe. They won’t improve your score. In fact, they will do the opposite!
Also, federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company. Take advantage and look at your free annual credit report. Make sure no one else has opened accounts in your name.
Your credit score is a vital part of your financial health. Be sure to check your credit score annually, and diligently pay off debts, rather than accumulating more!