When it comes to getting approved for a mortgage or almost any other form of financing, your credit score is king.
Before you start to fill out that application, a bit of credit 101 can help you learn why credit scores are important and what role they play in financial success.
Read on for a list of seven essential things you should know about credit and credit scores to help you get ahead.
1. Your Credit Score and Credit Report are Not the Same
A credit score gives lenders a quick snapshot of your financial health. Scores can range from as low as the 300s to as high as 900.
In essence, credit scores are a numerical assessment of your creditworthiness, while a credit report gives you much more in-depth and detailed information. Your credit report should show you every account you have, the current balance, and the status (in other words, your payment timeliness and if the account is still open).
It’s important to check on your credit report periodically to ensure that all information is accurate since the data shown is what affects your credit score. Contact one of the three credit bureaus immediately if you notice any discrepancies so they can make corrections.
2. Credit 101: Checking Your Own Score Won’t Hurt It
As a consumer, it’s important to know where you stand in terms of your credit score and other factors. If you need to check your score, it has no effect on the score itself.
When a lender checks your score, you may see the number go down slightly. That’s because official “credit pulls” can cause your score to lower just a bit, as it indicates you may be in the market for new credit and could increase your debt.
However, checking your score yourself via a variety of applications and websites won’t affect the number. It’s a good idea to check your score at least once a month to ensure that you’re still on track.
3. Different Bureaus, Different Results
One crucial part of credit 101 is to know that each credit reporting bureau uses a different scale and different factors to calculate your score. Which score lenders see will depend on which “model” they use to analyze your score.
For the most part, major mortgage lenders and credit card issuers use one of the big three bureaus. This includes Equifax, Transunion, and Experian. Some lenders could use one, while others might determine it’s best to look at all three.
Another score called your VantageScore is most commonly used by consumers to check their credit online or through other means. This particular score is not currently the standard for most lenders, but that’s not to say it couldn’t change in the future.
4. Utilization is Important
Every credit bureau uses several pieces of information to determine your official score. Utilization, or how much credit you currently use compared to how much available credit you have, accounts for around 30-percent of your score.
The more open and available credit you have and the smaller the balance, the higher your score should be. Ideally, the target percentage of credit used should hover around 30-percent or less.
For example, if you have around $6,000 of available credit, you’d want to make sure your total balances are around $1,800 or less. Keep your available credit numbers high and your balances low, and your score should be in a good range.
5. Late Payments Can Cause Significant Damage
In order to keep your credit score high, it’s very important to make consistent, timely payments. Even one late payment to a creditor can do serious damage to your score.
Thankfully, there’s a light at the tunnel if you fall behind on payments. First, many financial institutions may offer you a grace period or might even forgive you for one late payment so your score won’t be affected.
Negative information does fall off your report over time. If you’re not in a hurry to apply for a loan or other financing, wait until any negative marks disappear so your credit score can recover.
6. Mix Things up if Possible
One of the most overlooked credit facts is that your score is higher if you have a healthy mixture of accounts. What this means is that your credit cards may not be enough to boost your score, but it could increase if you have installment loans.
An installment loan is usually backed by collateral, such as a car or a home. These accounts show lenders that you’re responsible for a variety of debts other than just credit cards alone.
In terms of your score, the variety of accounts you have affects around 10-percent of the final number. If possible, try to maintain a good mix of accounts to include at least one installment loan.
7. A Great Score Helps you Save
Those with a higher credit score can save thousands of dollars in interest payments. Generally, the higher your score, the lower your rates will be on credit cards and loans.
It’s important to try and increase your score as much as possible before signing up for anything new. You can go here: https://moneytrumpet.co.uk/10-ways-to-keep-your-credit-file-sky-high/ to learn about ways you can keep your number higher.
Lenders reward borrowers who have a healthy score with lower interest and other perks. It’s definitely worth it to try your best to maintain and increase your credit score to put more money in your pocket.
Know the Score
Once you have a bit of credit 101 under your belt, you’ll be better equipped for a bright financial future. From lower rates and better terms to easy approval, knowing how credit scores work can make a huge difference in many aspects of your life.
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