Four Credit Score FAQs You Should Be Able to Answer
Even after high school, there is a grade that still counts: Your credit score.
During your school days, your focus was to make sure you did the best you could to get good grades. Outside of school, you’ve probably noticed that grades no longer mean much. However, there is a grade that still counts — and it’s called a credit score.
A high “grade” can save you hundreds, maybe thousands, in interest payments. It may also save you money on auto insurance. A low “grade” can keep you from getting that loan you want or maybe even keep you from renting an apartment or getting a job.
Here are four frequently asked questions about credit scores — and the answers.
Credit Score FAQ #1: How can I calculate my credit score?
The short answer: You can’t. The credit bureaus who create their credit score rules don’t divulge the exact details about how they come up with your score. However, they do tell us what areas they look at and the importance of each area. These are the areas included by the most commonly used FICO score:
- Your payment history – 35%. Most important is whether you pay your loans on time. Missing payments is a sure way to lower your score.
- How much you owe – 30%. You don’t want to max out your credit cards. That will lower your score. If you use a small percent of your available credit, that will raise your score.
- Length of credit history – 15%. The longer you have paid your loans, the better your score. But don’t despair, if you always pay your loans on time and keep a low credit use ratio, you won’t be dinged much for a short credit history.
- Credit mix – 10%. People who successfully repay various types of credit — such as auto loans, mortgages and credit cards — have, as a group, proved to be less risky than those who only use one type of credit, so they get a boost to their credit score.
- New credit – 10%. Applying for credit at a bunch of places at the same time is a red flag that someone may be trying to get access to a bunch of cash all at once. This may be a sign of financial trouble.
Credit Score FAQ #2: Should a young person get a credit card as soon as possible to establish a credit score?
Sometimes yes, sometimes no. If a new credit card user is going to make payments on time and pay it in full each month or keep a low balance, then having a credit card can help establish a good credit score.
However, many young people haven’t developed good habits and may be inclined to forget to make payments on time or to max out a credit card and then have a hard time making payments. That is going to result in a poor credit score. If in doubt, wait. No credit score is better than a poor one.
Credit Score FAQ #3: Should I close credit cards I don’t use anymore?
Over time, some people decide that they have acquired too many credit cards and decide to cut back. If you close all of the cards you don’t use anymore, you will end up lowering your credit score because your remaining available credit is lower while your debt has stayed the same. High debt usage percentage will drive your credit score down.
A better choice would be to just cut up the cards you don’t use without closing the account. That will keep your available credit high and unused. Of course, if your unused card has an annual fee, you should probably cancel it to avoid a fee for an unused card.
Credit Score FAQ #4: Is my credit score ever wrong?
Unfortunately, yes. The credit report agencies base their scoring on the information they acquire, so if something is incorrectly reported or if there has been fraud on your account, you need to dispute the errors with the credit report agency so it can be corrected.
Nobody cares what kind of grades you got in high school, but the same can’t be said about your financial “grade.” The good news is there is no correlation between how good a student you were in high school and how good a credit score you have.
Anyone who takes the time to learn how a credit score is calculated can take steps to make their credit score go up. It is worth it because it can help you qualify for the best loan rates and avoid possible problems with insurance, renting, and job applications.
If you have questions about your credit score, or are interested in applying for a credit card or loan, speak with a banker at a Zions Bank branch near you.
Don Milne is Financial Literacy Manager for Zions Bank.