What You Need to Know About Credit Scores

Posted by Leland On May - 1 - 2017 0 Comment

Credit scores can make or break you. They help you finance major purchases like a new car, a new house, etc. What you need to finance with the score is typically very important to your life, so having a poor one could be devastating. It seems, however, that many people do not know as much as they should about their credit score and what it means, so we’re here to help.

 

What You Need to Know About Credit Scores

 

What Is a Credit Score?

Credit scores and credit reports are not the same things. A credit score is a single piece of an overall credit report, which is calculated using the information on the report itself. A score is a 3-digit number based off an algorithm to calculate the likelihood that you will be able to pay off any debts in the 24 months after the score is created. The factors that go into the calculation include your payment history, how you’ve utilized credit before, the age of your credit, derogatory marks, and account mix and inquiries.

What You Need It For

Credit scores are necessary for any instance that requires the use of credit. This includes major purchase, including rentals, and loans. Examples can be the purchase or rental of a new house, apartment, land, vehicle, and more. For loans, a credit score can determine whether you receive the loan and at what interest rate you’ll have to pay it back. For business owners, credit scores can be particularly important as they can mean the difference between the survival of a company and its downfall. For instance, many companies need to purchase and rent forklifts for heavy lifting, but many companies that offer this will require a credit check. Daily EQ Houston Branch even requests it and provides a form right on their main page.

What Can Make Your Score Go DownWhat You Need to Know About Credit Scores

The 5 factors listed in “What Is a Credit Score?” are usually the main factors causing a drop in your score. Credit utilization essentially shows creditors how much credit you are currently using, so if you have a lot of outstanding debt, including a significant amount on your credit cards, it could drag your credit score down. Payment history shows how reliably you have paid off creditors in the past. Missing or late payments can massively bring down your score. Derogatory marks (like bankruptcy, tax liens, and accounts in collections) and hard credit inquiries (these appear on your credit score every time you ask for a new line of credit) also affect it. If you have any derogatory marks or appear to have asked for a significant number of credit lines in a short period of time, your score decreases. The average age of your credit lines can also negatively affect your score as young credit lines often mean lower credit. Lastly, the account mix is a factor. This means that if all or most of your credit is not spread out among multiple creditors, your score will go down.

Where the Score Comes From

You have multiple credit scores from multiple scorers. Most creditors use the FICO score, which comes from Fair Isaac Corp. VantageScore was created by credit bureaus and is the second most used. Dozens of other, less-used scores exist, however, meaning the score you see before asking for a loan may not be the same as the score your creditor sees. Despite this, scores typically do not vary greatly as they are all created based on your credit report, of which there is only one.

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