FCTI - Blog

Why Should You Care About Your Credit Score?

Posted by Rebecca Hellmann on Sep 24, 2020 6:15:00 AM

Your Credit Score is an essential part of your financial identity. It is a crucial factor in determining many pieces of your future, including eligibility for loans or credit cards and effective interest rates. Some apartments and property owners check the credit of their renters before approving occupancy.

Perhaps the most essential aspect of a Credit Score is its ability to help you prevent fraud. Knowing how these scores are determined and how to check them regularly allows you to track when accounts are opened in your name. If accounts are opened without your authorization, you can take action to shut them down and prevent damage to your credit and finances.credit-scores-092020

But what factors go into determining your Credit Score? Here are the five (5) aspects used by the credit agencies.

  1. Your payment history weighs the most heavily on your overall Credit Score. Credit card companies, loan providers, and other creditors typically report monthly to the credit agencies regarding payments received. This is one reason why it is so important to make at least minimum payments to all of your bills by the due date. Most businesses also have a “grace period” of around fifteen days in which payments received are not considered overdue.

Should you be unable to make a payment, contact the business right away to make arrangements. In most cases, communicating with the company can help avoid negative reports to the credit agencies and keep your credit clean. However, skipping payments without any notification or negotiation will lead to a decrease in overall credit score.

  1. The percentage of your available credit used is another large factor. The agencies compare how much money you owe versus the limits on your credit. For instance, owing $300 on a credit card with a $500 limit is using 60% of available credit. That isn’t good. Owing $300 on a card with a limit of $2,500 uses 12% of your available credit. That’s good. The best way to manage this piece is to keep your credit use below 30% on any credit card in your wallet.
  1. The types of credit you are using (or credit mix) has a low-level influence on your score. People who show they can manage credit cards and loans are considered less risky. Those with one type of credit but not the other raises questions about their ability to manage their money and repayments properly.
  1. The number of credit score inquiries is also a consideration. Applying for new credit comes with its consequences. Each time you apply for a credit card or loan, the creditor will make a request to one of the two central agencies (TransUnion or Equifax). For each request, the agency will temporarily remove a few points from your score. Auto sales are especially bad for this as they will often blast out requests for loan rates to multiple banks or credit unions, who will then use your information to make a Credit Score inquiry.

It is best to be picky about opening new accounts. Carefully select your credit cards and loan providers. Shop around for the best interest rates and set your limits. This will not only allow you to manage the benefits of your credit cards better but give you extra leverage should you be in the market for a vehicle.

download-this-free-budget-worksheet

  1. The average length of time for your accounts is the final item determining your Credit Score. Your credit history is not extremely influential, but it is slightly more important than your credit mix or inquiries. If you thought paying off your credit cards quickly and closing the accounts was a good idea, this item would work against your plan. For account history, longer is better. Unless there is an annual fee or other good reason to close the account, a more lucrative strategy would be to follow through with the payoff and set the card aside.

Credit mix, account history, number of inquiries, credit use, and payment history are the five factors in determining your Credit Score. This is the information under consideration by lenders and other companies determining your eligibility for specific products or services. It is also a good way for you to keep track of where you owe money and when someone may have stolen your financial information. Be sure to do your own checkup at least once a year to keep your self on-track and safe.

Free Credit Check Resources:

Topics: financial literacy, consumer budgets, money management, household budgets

 

Written by Rebecca Hellmann

Rebecca Hellmann has been researching and writing in the payments technology industry for over six years. Prior to the payments industry, Rebecca developed marketing, branding, and content for businesses such as Bil-Jac, Benjamin Franklin Plumbing, and Homestead Furniture. She currently works as Director of Marketing for FCTI, Inc.
Find me on: