What is a credit score?
Financial matters can be complicated, but understanding your credit score doesn't have to be. If you have any credit accounts, such as credit cards or loans, you have a credit report. Your credit report is a record of how you manage your money. This data is then distilled and calculated to create your credit score. While lenders use these reports and credit scores to decide whether or not to extend you credit, it leaves a lot of room for interpretation.
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How is my credit score calculated?
To see how it all breaks down, here's an example of how most scores are calculated. Your payment history generally makes up 40% of your score, while credit utilization is 20%. The length of your credit history contributes 21%, and total amount of recently reported balances 11%. Finally, new credit accounts are responsible for 5% while your available credit makes up 3%. All of these values are then broken down into a credit score, which typically ranges between 300 and 850—the higher the number the better. TransUnion's credit score check can let you know where your score falls.
What affects credit scores the most?
Your payment history is the most important aspect of your credit score, because it shows how you’ve managed your finances, including any late payments. Your credit history is also very important, as it demonstrates how long you've been managing your accounts, when your last payments were made, and any recent charges.
What is my credit mix?
Your credit mix refers to the different types of credit you have, such as credit cards and mortgages. In addition to your credit mix, the number of accounts you have will also influence your score.
Will my score be the same at all three credit bureaus?
The three major credit bureaus—TransUnion®, Experian and Equifax—are responsible for collecting and maintaining consumer credit reports in the U.S. These reports are then provided to subscribers, such as landlords, mortgage lenders, credit card companies and others who are deciding whether or not to extend you credit.
It can be confusing when your score seems high but you still get denied for a new line of credit. Chances are you're not looking at the same score as your bank or finance company. Subscribers don’t work with every credit reporting agency, so the credit report information included in one report might be slightly different from that in another.
Check your credit scores and reports from each bureau annually to ensure all the information is accurate. By law, you're entitled to one free annual credit report. You should also use a credit monitoring service year-round. TransUnion offers some of the latest and most innovative credit monitoring services, like Credit Lock and Instant Alerts. These services will help you spot inaccuracies, potential fraud and other blemishes that could lead to higher interest rates.
Understanding Your Credit Profile
Determining your score is more complicated than just weighing the different aspects of your credit history. The credit scoring process involves comparing your information to other borrowers that are similar to you. This process takes a tremendous amount of information into consideration, and the result is your three-digit credit score number.
Remember, no one has just one credit score, because financial institutions use more than one scoring method. For some agencies, the amount owed may have a larger impact on your score than payment history.
What personal details do not affect my credit score?
Now that you have an idea of what goes into your score, it's good to know what doesn't factor into your score. A recent survey from the Consumer Federation of America found that out of 1022 adult respondents, 40% believed marriage status influenced credit scores, while 43% thought age also played a part.
Your score is a representation of how you manage financial responsibility, not a testament to you as an individual. Things like age, ethnicity, religion and marital status are excluded in the calculation of your score. Your employer, salary and occupation are likewise not included in the equation.
Maintaining Healthy Credit
A credit reporting agency needs a track record of how you’ve managed credit before it can calculate a credit score. Typically, six months' worth of activity will provide enough information to generate a score. As your credit history increases, your score might rise or fall based on how you pay your bills over time.
Check your credit score regularly with a monitoring service, but don’t let minor fluctuations stress you out. Your credit score is just a snapshot of how you’re managing your credit at a particular moment in time. Paying your bills on time, maintaining low balances and not taking on too much debt can help to rehabilitate your credit profile, resulting in a higher score.