Do you have a good credit score? It sounds like a simple question, yet you may not know the answer - in fact, you may not even know what your score is. Yet keeping on top of it and understanding how your financial activities affect it may make the difference in whether you are approved for a loan or given a better rate on your insurance. And according to a recent Time Magazine article, good credit scores can save borrowers thousands of dollars in interest on everything from mortgages to auto loans and credit cards. Here's what you need to know about good credit scores and how to improve yours.
What Are Credit Scores?
Credit scores are three digit numbers representing your credit risk and are based on the information from three credit reporting agencies - Experian, Transunion, and Equifax. The Fair Isaac Corporation (FICO) uses information from all the credit reporting agencies to calculate what is known as a FICO score for each agency. FICO reports that over 90 percent of lenders today use FICO Scores for credit decisions.
It's important to note that credit scores may differ between these companies because each score is based on their own credit scoring criteria in the credit file for that particular agency. The agencies also each have their own proprietary credit scoring models.
Finally, there's also the VantageScore, a credit rating meant to compete with FICO, created by the three reporting agencies using combined information.
Lenders use credit scores along with other information regarding income, other debts, legal judgments, and past borrowing repayment history to make lending decisions when you apply for new credit like a mortgage or credit card.
The Information Credit Scores Depends On
Credit scores are calculated using information regarding your current and previous credit history. It includes your repayment history, the number and type of credit accounts you have - loans, lines of credit, mortgages, etc. Credit scores also depend on the total amount of debt you owe, how long you've had each credit account, and whether there have been collection actions taken against you.
How to Improve Your Score
If your current score doesn't fall into the "good" category, don't despair. Take action to improve your score with the following:
- Pay your bills and debt payments in full and on time, every month.
- Reduce your credit account balances so they aren't approaching your limits. Being "maxed out" may make it difficult to land good credit scores.
- Wait it out. As long as your credit activity is satisfactory, generally longer credit histories have positive impacts on credit scores.
- Minimize your new credit applications. Multiple new credit applications in a short time frame may have a negative impact on credit scores.
- Limit your open credit accounts, but be careful! While you do want to show that you have more than one credit account, too many accounts of certain credit accounts, such as credit cards and finance loans, may not have a positive affect on your score.
Wondering just how you're doing when it comes to your score? Visit LendingTree today to get your Free Credit Score so you have a better idea of how close you are to a "good" credit score.