Learn about your credit scoresYour credit score is a big factor in determining your interest rate and if you qualify for an auto loan. To help you understand more about your credit score, we help answer the below questions.
What is a credit score?
When you apply for a credit card, a loan, or even insurance, lenders check your credit score. This number is used to evaluate your creditworthiness. Your creditworthiness is an estimate of how likely you are to repay your financial commitments.
Why is it important?
Your credit score can impact everything from your ability to get an auto loan or a credit card, to rent an apartment, to get a mortgage or even auto insurance. Your credit score can also play a role in determining your interest rates. FICO credit score ranges from 350 (very unlikely to repay) to 850 (very likely to repay). Often a 720 or higher is considered a strong FICO credit score, but different lenders have different standards.
There are multiple credit scores. Is this true?
Yes. You can have different credit scores depending on which credit reports and which scoring models are used. There are three major credit reporting agencies that provide credit reports: Experian, Equifax, and TransUnion. There are also different credit score models that are tailored to different industries and therefore produce different credit scores. For example, your auto lender will likely use a different score model than your credit card company.
Some key factors that are used in credit scoring models are explained below.
1. On-Time Payment Percentage
This is the percentage of payments you’ve made on time during your credit history. It’s a factor that often weighs heavily into your creditworthiness, so just one or two late payments could significantly impact your score. If you’ve had trouble keeping up with payments, set up automatic bill pay or create calendar reminders for bill due dates.
2. Credit Card Utilization
This percentage is calculated by taking your total credit card balances and dividing that number by your total credit card limits. It essentially shows creditors how much of your available credit you use on average. A good rule of thumb is that lower credit card utilization rates are better.
3. Average Age of Open Credit Lines
The longer your credit history and the older your accounts the better. That is why it can be a good idea to keep older credit cards open and active.
4. Total Accounts
Consumers with more accounts (or more lines of credit) often have higher credit scores because it indicates that more lenders are willing to give them credit. Having a good mix of different types of credit is good for overall credit health as well. But remember it is a balance and you should only open accounts you actually need.
5. Hard Inquiries
When you apply for credit like a credit card, mortgage or auto loan a hard credit inquiry is initiated on your credit report. One hard inquiry will usually have little impact, but multiple inquiries can have a larger impact. A soft inquiry is when you check your rate to see what you qualify for. As a reminder, when you check your rates through Lending Club, this is a soft inquiry and won’t impact your credit score.
6. Derogatory Marks
Derogatory marks are negative items on your credit report like collections, tax liens or bankruptcy. These records can stay on your credit report for 7 to 10 years. If you have one on your credit report, it can show a lender that you may have mismanaged your credit in the past.