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Understanding Your Credit Score

Whether you're applying for a mortgage or credit card, obtaining auto insurance, or even leasing an apartment or applying for a new job, chances are someone is checking your credit score.

Your credit score is a three digit number lenders use to determine what kind of credit risk you are. Your score can determine not only if you are approved for a loan, but how much you will be approved for and what interest rate you will pay.

Credit scores can range from 300 to 850. Low credit scores equal high credit risk. This means if you have a low credit score, you may not get approved for loans at all, or have to pay high interest rates and fees to obtain that credit.

High credit scores equal low credit risk. The higher your credit score is, the better the financial options that will be available to you.

What makes up my credit score?

Payment History - 35%

Your payment history is the biggest factor in your credit score. Late payments will hurt your score more than anything else will. Public record and collection items are also looked at in this section. If you have any bankruptcies, judgments, tax liens, foreclosures, etc., they will be factored into your payment history.

Tips
  • Pay your bills on time.
  • If you are delinquent on any accounts, get current and stay current.
  • If you are having difficulty paying your bills, contact your creditors or a reputable credit counseling agency, such as CCCS of Buffalo.

Outstanding Debt - 30%

Outstanding debt not only factors in how much you owe on your accounts, but also what the balances are in relation to your credit limits. If your credit cards are "maxed out", or getting close to their credit limits, this is negatively impacting your credit score. It is best to keep balances on revolving credit as low as possible.

Tips
  • Keep your balances low; try to never charge more than 50% of your credit limit.
  • Pay off debt rather than moving around through balances transfers and refinances.

Length of Credit History - 15%

The longer you have had credit history, the better it is for your score. Remember, your credit score is looking at how likely you are to repay a debt. The longer your credit history, the more information there is to look at. Your credit score generally averages the age of all of your accounts, and also looks at the ages of your newest and oldest accounts.

Tips
  • Do not close old accounts, especially if they are long standing. Always keep your oldest accounts on your credit report open.
  • If you are establishing credit, do not open too many new accounts at one time. This will lower the average age of all your accounts and may lower your credit score.

New Credit - 10%

Too many applications for credit within a short time, or opening too many new accounts can reflect negatively on your score. If you are shopping for mortgage or auto loan rates however, the credit bureaus do recognize the fact that you're comparison shopping. It's best to not open too many unsecured revolving accounts at one time.

Tips
  • If shopping for a mortgage or auto loan, try to shop within a short period of time (30 days or so), so the credit bureaus can see you are shopping around rates.
  • Be careful about opening accounts you don't need.
  • It's ok to check your own credit report and score; it does not negatively impact your score.

Types of Credit in Use - 10%

Your credit score looks at what kinds of credit you have. Do you have revolving credit like credit cards, and installment accounts like auto loans? Have you only had one of these? It's generally best to have a mix of different types of credit. How many open credit accounts you have is looked at also. If you have too many open accounts it may be considered a lot of potential debt. How many is too many is based on your overall credit picture, but the people with the best credit scores have an average of around six open accounts at any given time.

Tips
  • Do not open credit accounts just to have a better credit mix.
  • It's ok to have credit cards, but they need to be managed responsibly.
  • Remember that closing a credit account doesn't make it go away, and may negatively impact your length of credit history.
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