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Your Credit Score Demystified

Credit scores can be a complicated thing to understand. This short guide will help you better understand your credit score, and credit scores in general.

what makes up a credit score

Taking the Mystery Out Of Your Credit Score

Hoping to take out a mortgage loan? Do you need to finance a car? Are you applying for a new job?

Then you need to know about your three-digit credit score.

Your credit score, often referred to as your FICO score, is the single most important number in determining if you can borrow money from mortgage, auto or personal lenders. This score also determines the interest rates that lenders will charge you. And if you’re applying for a job, you might be surprised to learn that many companies check credit scores when weighing the merits of applicants.

Because these scores are so important, it’s necessary for you to understand how they work and, more importantly, the steps you can take to improve your own scores.

In general, lenders prefer to work with borrowers whose credit scores are 740 or higher. These borrowers will qualify for the lowest interest rates and fees. They’ll also receive the best credit-card offers.

Borrowers whose scores are below 620, though, will struggle to qualify for loans from traditional lenders. Instead, they’ll usually have to take out sub-prime loans that come with often sky-high interest rates. They’ll also struggle to qualify for all but the least attractive of credit-card offers.

What makes up your credit score? The most important factor is your history of paying bills. If you have a history of making late payments or skipping payments altogether, your credit score will plummet. That’s why one of the first steps toward rebuilding your credit score involves starting a new history of paying your bills, all of them, on time each month.

Your credit score will fall, too, if you owe a lot of money on multiple credit-card accounts. Lenders view this as the sign of consumers who are overextended financially. They worry that adding one more loan to your burden will cause you to default on your payments.

The amount of years in which you’ve had access to credit also impacts your credit score. In general, the longer your credit history, the higher your credit score will be. Lenders like to work with borrowers who have shown that they already know how to handle the responsibility of paying their bills on time.

Other factors will absolutely wreck your credit score. For instance, declaring personal bankruptcy, whether Chapter 13 or the more severe Chapter 7, will send your credit score crashing. And these bad marks on your credit report take a long time to disappear. A Chapter 13 bankruptcy filing will remain on your credit history for seven years, while a Chapter 7 will stay for 10.

Housing foreclosures are also highly detrimental to your credit score. These negative marks stay on your credit history for seven years, too.

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