It’s March, which means it’s credit education month! While most of us know what a credit score is, a lot of consumers do not fully understand what factors impact your credit score. Credit scores reflect your payment patterns and credit history over time and almost all major lenders use them.
So why is your credit score so important? Your credit indicates to lenders how likely you are to pay back your loan. In the eyes of a lender, a lower score means you’re less likely to make payments on time, or even pay back your loan at all. Your score also determines what types of loan you will have access to, and the rate of interest that you will pay. Those who have a great credit score are likely to get a lower interest rate than those with a low credit score.
Establishing credit history is a critical step in your financial future. It is hard to buy a car or house if lenders don’t know whether you’re likely to pay them back or not. That’s why it’s important to establish credit.
Keep in mind these five important factors when establishing credit:
- Payment history. Your bill paying history is the most important factor on your credit score. A good payment history shows that you manage your money well and are likely a responsible borrower. Be sure to pay all your bills on time. If you think you might be late on a payment, call your lender to let them know. You might be able to work something out.
- Credit utilization. Credit utilization is the amount of money you spend compared to your available credit. For example, if your credit card has a limit of $1,000 each month and you only spend $200 each month, your credit utilization is 20 percent. Keep your credit utilization ratio under 30 percent to avoid drops in your credit score.
- Length of credit history. This is based on how long each credit account has been open and how long it has been since you’ve used certain accounts. Having a longstanding history with a credit account will help establish your credit.
- New credit. Borrowers should avoid opening too many credit accounts at the same time. This could suggest that you are in financial trouble, and lower your credit score.
- Credit mix. Credit mix is the variety of credit that you have taken out. Different types of credit include installment credit such as car loans and student loans, or revolving credit such as credit cards or retail accounts. A variety of debt indicates that the borrower can handle all different sorts of credit.
Want to find out what your credit looks like? Every 12 months, you are entitled to order a free copy of your credit report from each of the major credit reporting agencies (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. This website is the only one that is government authorized to provide you with free copies of your credit score.
For more information on credit, visit https://www.usa.gov/credit-reports
Stay tuned for more credit education blog posts this March!