Understanding Your Credit Score

What makes up a credit score?
There are several factors that go into your credit score:

-Payment history
-Length of credit history
-Amounts owed

-Type of credit
-Hard/soft hits
-Derogatory remarks (collections, bankruptcy)

Payment history and derogatory remarks (collections, bankruptcy, etc.) comprise the greatest percentage of your score.

What does my credit score number mean?
There are four credit reporting agencies that creditors reference: Equifax, Experian, Transunion, and FICO. All except FICO are what lenders typically check. FICO scores have a much higher standard and usually a lower score. Mortgages, autos, and loans may require a FICO score check.

Your score will tell you if your credit is good or could use some work. Here’s how the three credit reporting agencies rate your credit:

Exceptional 800-850
Very Good 740-799
Good 670-739
Fair 580-669
Poor 300-579

If you’d like to get a FREE copy of your credit report, check out the Annual Credit Report

Payment history
This is fairly obvious. On-time payments positively affect your score, while late payments, even just one day, are enough to drop it.

The best way to guarantee on time payments is to set up an auto-pay with your bank that will send the minimum (or any other amount) due.

Extra payments
Multiple payments within the month will help improve your score tremendously. Any additional amount paid, even just $10, is beneficial because the credit agencies only see an extra payment for the month, and not the amount paid.

Soft Hits & Hard Hits
Hits are when a lender (creditor) runs your credit report in order to determine credit eligibility and the credit amount.

Pre-approval is most often a soft hit. Soft hits do not affect your score and the creditor will determine your eligibility, in part, based on your credit score.

Hard hits will result in a loss of a few points and typically stay on your report as inquiries for 6 months to a year.

If you’re pre-approved and would like to move forward with a creditor, then a hard hit will follow the soft hit. Hard hits are done when you’re ready to sign on the dotted line. It’s always a good idea to ask if running a credit report will result in a soft hit or hard hit.

Length of Credit History
Simply put, the longer the history the better. This is out of your control when trying to rebuild credit. But, the good news is that your history can’t be taken away and just gets better with time.

Credit Limits
Credit cards all have limits as to how much credit you’re allowed. A higher limit is always better than a low limit in regards to your credit score. Some want a low credit limit to help keep purchases in check. However, just because one acquires additional cards to raise your total amount of credit available doesn’t mean they need to be used.

Amount of debt
Generally it’s good to keep your debt to 30% or lower of your limit. However, if you’re trying to re-build your credit score it’s best to keep the debt to just 10% or less.

You can see how the total amount of credit available is linked to your total credit debt. For example, a $1,000 credit limit would allow you to keep a running balance of just $100keeping debt to just 10% would mean on a $1,000 limit, you’re able to keep a running balance of $100. But if you have a limit of $20,000 you’re able to keep a running balance of $2,000 without it having a negative effect on your credit score.

When rebuilding credit after a bankruptcy, treat any new credit cards like cash. Paying off purchases immediately makes sure you stay on track and you don’t have to worry about making scheduled payments. It also helps your credit score!