Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A credit score is a number that lenders use to determine the risk of loaning money to a given borrower.
Credit card companies, auto dealers, and mortgage bankers are three types of lenders that will check your credit score before deciding how much they are willing to loan you and at what interest rate. Insurance companies and landlords may also look at your credit score to see how financially responsible you are before issuing an insurance policy or renting out an apartment.
Here are the five biggest things that affect your score, how they affect your credit, and what it means when you apply for a loan. Your credit score shows whether or not you have a history of financial stability and responsible credit management. The score can range from to Based on the information in your credit file, major credit agencies compile this score, also known as the FICO score. Here are the elements that make up your score and how much weight each aspect carries.
The most important component of your credit score looks at whether you can be trusted to repay funds that are loaned to you. This component of your score considers the following factors:. FICO scoring considers your credit utilization ratio , which measures how much debt you have compared to your available credit limits. This second-most important component looks at the following factors:. Your credit score also takes into account how long you have been using credit. For how many years have you had obligations?
How old is your oldest account and what is the average age of all your accounts? Long credit history is helpful if it's not marred by late payments and other negative items , but a short history can be fine too as long as you've made your payments on time and don't owe too much. Close your oldest account and you could see your overall score decline. Your FICO score considers how many new accounts you have.
It looks at how many new accounts you have applied for recently and when the last time you opened a new account was. Talk to your creditors before you miss payments to try to alleviate potential effects on your accounts.
You can get free credit report information from NerdWallet. Use that access to monitor for potential errors that could end up hurting your credit score.
If you see something that doesn't add up, you can request the in-depth reports you can get annually from the three credit reporting agencies: Experian, TransUnion and Equifax. Just one late payment. Not paying ALL of your bills on time. Applying for more credit. Canceling your zero-balance credit cards. Transferring balances to a single card. FICO says consumers with six or more inquiries can be up to eight times more likely to declare bankruptcy.
A collection occurs when a creditor either sells your unpaid debt to a third party or hires an outside firm to collect the payment. The more recent a collection account, the more it will hurt your credit score. A collection can reduce a high credit score or above more than points. Collections can stay on your credit report for up to seven years. Declaring bankruptcy has the biggest credit score impact, costing anywhere from to points.
A bankruptcy can stay on your credit report for up to 10 years. A foreclosure can cause a credit score to drop by as many as points and can stay on your credit report for up to seven years. A deed in lieu is a process by which a homeowner can avoid foreclosure by turning the property over to the mortgage lender.
The lender then sells the property to cover its loss. It can lower your score by as many as points, on top of any damage from missed mortgage payments. Settling a debt with a creditor for less than what was originally owed can lower your score by anywhere from 45 to points.
Moving your card debts into a consolidation loan could cause a slight drop in your score because of the hard inquiry, but may help your score overall as your card balances are paid off with the loan. According to FICO, refinancing a loan can have a small impact on your credit score if it appears on your credit report as the same loan with changes.
In this case, your score may take a slight hit from the new hard inquiry. But the opposite can happen if the account is delinquent, the balance is high or it has any other score-killing negative items.
Credit mix accounts for 10 percent of your FICO score. To qualify for a FICO score, you must have at least one credit card or loan account that has been open for six months and has been reported to the credit bureaus within the past six months. Credit reporting errors can damage your ability to qualify for credit cards and loans. Instead, consider keeping old credit card accounts open and put your cards somewhere for safekeeping.
That way, your accounts can add to the average length of your credit history and available credit, which can only help your credit score over the long haul. Identity theft is fairly common these days, and statistics show that an array of hacking strategies aimed at consumers are on the rise. If you fail to do so, you could easily be a victim of theft and not find out for months or even years.
Fortunately, you can check your credit reports from all three credit reporting agencies—Experian, Equifax, and TransUnion— once a week through April , and after that once per year using the website AnnualCreditReport. Unfortunately, you may regret your choices if you do eventually need to borrow money to finance a car or take out a mortgage to buy your own home.
Tempted by the enormous signup bonuses you can earn on rewards and travel credit cards? Too much new credit can cause your score to temporarily drop, which could make it more difficult to qualify for loans with the best rates and terms in the future.
Keep in mind that, when you cosign for a loan you are jointly responsible for repayment of that liability.
Before you cosign for a loan, the Federal Trade Commission FTC suggests making sure you can repay monies borrowed if you absolutely had to. Cosigning on a loan is another good reason to check your credit reports regularly, and also to sign up for a free credit monitoring service like Credit Sesame or Credit Karma.
These services keep an eye on your credit for you, and you can even set up notifications so you know right away if a late payment is made. Not only will you likely take a hit to your credit score for opening a new credit card, but your utilization could increase if you transfer your balances over and use your old credit card to rack up more debt over time.
This means a single late payment could cause serious damage to your score, but it also means multiple late payments could harm it even more. The best thing you can do for your credit is always pay your bills early or at least on time every single month.
The most important steps you can take include paying all your bills early each month, keeping debt at a minimum, and refraining from opening or closing too many new cards. If you follow this advice, your credit score should never hold you back from the life you want.
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