How Your Credit Score Can Affect the Interest Rate on Your Loan
Your credit score — or FICO®, as it’s often referred to — is a mathematical calculation used when determining the amount of risk a lender would be taking in offering you a credit card, a car loan, a student loan, or a mortgage.
Scores range from 300-850 and are calculated from multiple factors that make up a percentage of your payment history. The higher the score, the lower the risk. There are three different agencies that make credit scores available to you and prospective lenders. Each agency tracks your credit history and compares the results to the general population: Equifax, Experian, and TransUnion.
Info found on your credit report:
Personal Information: name, address, social security, date of birth, employment
Account summary:
- the types of credit you use – credit cards, car loans, mortgage, etc.
- the length of time those accounts have been open
- whether your bills were paid on time
- how much credit you’ve used
- amounts owed
- any “new credit” applied for recently
The weight or percentage used to arrive at your total credit score is based on these five categories:
- Payment History (accounts for 35% of your credit score):
- review of all credit card accounts, retail accounts, installment loans, finance company accounts, and mortgage loans
- payment history, bankruptcies, foreclosures, law suits, garnishments, items in collection, liens, judgements, or other matters of public record
- Amounts Owed (accounts for 30% of your credit score):
- all types of credit accounts
- the number of accounts with current balances
- how much each individual credit line is used
- outstanding amounts on installment loans
- Length of Credit History (accounts for 15% of your credit score):
- how long accounts have been open
- how long since each account was used
- Types of Credit (accounts for 10% of your credit score):
- types of credit accounts
- number of each type
- New Credit (accounts for 10% of your credit score):
- number of new accounts by type
- length of time since you last opened a new account
- number of recent requests for your credit report (inquires remain on the report for two years but the score only looks at the past 12 months)
- length of time since credit inquiries were made by lenders
- whether you have a good recent history following past payment problems
How to maintain and improve your credit score:
- Check your credit report once annually – check your report six months prior to applying for a loan
- Pay all bills on time – keep your accounts current
- Keep balances low on credit cards and other sources of revolving credit – maintain a reasonable balance on credit cards; paying the minimum each month can negatively affect your credit score
- Pay off debts – don’t transfer balances
- Credit history – don’t close unused accounts
- Don’t open new credit card accounts – new accounts lower your average account age
- Don’t open a lot of new accounts at once – particularly if you have only recently established credit
- Avoid credit repair agencies – don’t pay to improve your score. Instead, work with creditors to bring down balances by making on-time payments
- Consider consulting a Credit Counselor – credit can be confusing, but a professional can provide valuable assistance
The information contained in your credit report and reflected in your score gives lenders a clear picture of both your borrowing and repayment history. The better the score, the better rates and terms you can expect to receive.
To get your current score and dispute any errors you may have, contact the agencies directly:
Equifax: (800) 685-1111, www.equifax.com
Experian: (formerly TRW): (888) 397-3742, www.experian.com
TransUnion: (800) 888-4213, www.transunion.com
