Calculating credit scores is complicated, But if you understand these 9 key credit score terms, you will be well on your way to building a better credit score and a brighter, more secure financial future.
A number (usually between about 300 and 800) that represents your creditworthiness. The lower your score, the more of a risk you are to lenders, the less likely you are to get approved for financing. The higher your score, the more trustworthy you look, the better your chances of approval and favorable interest rates. The most common type of credit score used by approximately 90% of today’s lenders is the FICO score. There are many others out these used by lenders in specialty industries, but if you are confident in your FICO score, these other scores will not be far off.
A detailed listing of all of your current and past credit accounts, loans, and public record information. It lists the date each account was opened, the current status (paid as agreed, late, collection, etc), the maximum balance, the current balance, and the credit limit. Public record information could be about tax liens, collection judgements, bankruptcies, repossessions, and foreclosures. The information on your credit report is covered by the Fair Credit Reporting Act – so if there is old (more than 7 years in most cases), inaccurate, or erroneous information on your report, you may have legal recourse for a credit report dispute or a claim for monetary damages. Give us a call and we’ll talk over your options with you.
The relationship of how much you owe compared to your total borrowing limit for revolving debts like credit cards (see below). In simpler terms, it’s a measure of how maxed out you are. And about 1/3 of your FICO score is based on your utilization ratio! The golden number to shoot for is 7%. So, if you have a total of a $10,000 borrowing limit when you add up the credit limits on your credit cards, you should have no more than $700 charged up on those cards all together. If you are WAY over that 7% mark – don’t panic. Start a debt snowball and start getting those balances under control.
These are debts like student loans, car loans, mortgages, or furniture financing plans. You cannot add to these debts (except with accumulated interest or late fees). These debts calculate into your credit score in several ways, but the most important thing you need to remember is to pay your installment debts on time every time. If you are in a financial pinch, reach out to the lender. They will often be more than happy to adjust your payment plan. You’ll probably end up paying more interest in the long run, but that’s still better than racking u plate fees and sabotaging your credit score.
This is the formal name for bank or store credit cards. You have a maximum borrowing limit and the balance can go up and down as you make purchases and payments. These credit lines are the ones used to calculate your utilization ratio. Make sure you work to keep the balances low. If you have a few bad months and you lean heavily on credit to get by, make sure you have a repayment plan in place as soon as you are back on your feet.
About 10% of your credit score is based on how diversified your credit profile is. You should aim to have both installment loans and revolving credit on your credit report. After you pay off your car or student loan, you don’t have to rush right out to finance something else on a payment plan right away. But once that paid off loan is 6 – 12 months old, you may want to find something small to finance – like a new tv or a used car for your teen driver – to make sure your credit mix stays healthy.
By far this is the most important part of your credit score calculations. How well you pay your bills on time is worth about 35% of your FICO score. If cash flow is in a crunch, and you have to choose between paying a utility or a credit card late – the utility is just going to have to wait. Pay the credit card first. One 90-day late credit card payment does about the same amount of damage as a 1 year old bankruptcy!
Secured Credit Card
These are more like debit cards than an actual credit card. You must make a deposit in to the account to open it to “secure” the account. You spend against that deposit and make payments back to replenish it. Some banks will report your payment history to the credit reporting agencies to help you build your credit profile. Some will not. Some also convert to “traditional” credit cards after a certain number of on-time payments. When a secured card is your only option, do a little research first to make sure you find one that will help you build your credit report.
Becoming an authorized user on someone else’s credit card is a way to “borrow” their excellent payment history to buffer some less-than-perfect remarks on your credit report. If you have a family member who has excellent credit, you can ask to become an authorized user on their account. Be prepared for push-back. If your relative knows you have so-so credit, they may be resistant to putting your name on their account. If all you want to do is build up your history, tell them not to give you a card. If you don’t have access to the account number, you can’t spend any of their money. And, remind them that the credit information only flows one way – from their good report to yours for only that account. Your poor credit history cannot flow back onto their good report.
When a creditor requests access to your credit report data it is called an inquiry. There are two types of inquiries – hard and soft. Hard inquiries can affect your credit score. Too may hard inquiries in too short of a time period can make you look desperate or like there is financial trouble heading your way. The exception is if you are rate shopping for a particular kind of financing – like for a mortgage or auto loan. Several hard inquiries for the SAME type of credit in a series of a few weeks is considered “rate shopping” and will not do undue damage to your credit score. The other kind of inquiries (soft inquiries) do not negatively affect your credit score. They occur when a creditor is checking you out for pre-approved offers or when you are checking your own credit.
If you can keep these key terms straight, you are way ahead of most of the crowd! Knowledge is empowering! We are here to help you use it to build the best credit score you can!
If you have any questions, please give us a call at 770-952-5168 or contact us online.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.