Do you look at your credit score as a mysterious number that rises and falls for no good reason? Do you look at your credit score as an asset to be managed? Do you look at your credit score at all?
The annual credit score survey from the Consumer Federation of America (CFA) and VantageScore Solutions shows that more Americans are checking their credit score (57% in 2018 versus 49% in 2014), and consumers who obtained their scores have greater knowledge about credit scores in general.
Most survey respondents understood that missed payments, large credit card balances, and bankruptcies factor into a credit score – but around 40% of respondents incorrectly assumed that age or marital status were also credit score factors. Even more respondents (62% to 64%) assumed that tax liens, civil judgments, and recent medical collection accounts affect credit scores.
What does affect your credit score? Scoring systems use algorithms to distill your account information from credit bureaus down to a single credit score, using the following five main areas of risk assessment.
1. Payment History –This is the most important factor. If you've missed or delayed payments in the past, you're at high risk for doing it again.
2. Credit Utilization – If you're near your credit card limits, you're considered a higher risk for new credit. Generally, credit experts advise that you should use less than 30% of your revolving credit to keep your score high.
Total debt is considered under this category as well, but is less important than your ability to repay. However, if you continue to carry big balances or your balances are continually increasing, that's a sign of trouble.
3. Length of Credit History – The longer you've had a credit account in good standing, the more likely it is that you manage credit wisely.
4. New Credit – Opening multiple accounts in a short period of time or dramatically increasing your credit limits raises a red flag to lenders. Why do you need all this new credit, and will you be able to repay it?
Although scoring systems generally rank this factor as less influential than those mentioned above, lenders are likely to give this behavior greater scrutiny.
5. Mix of Credit – If you can manage different types of revolving and non-revolving credit like mortgages, credit cards, and auto loans simultaneously, you're highlighting lower risk factors.
Variables that don't affect your credit score at all include age, gender, race, marital status, employer, salary, job title, employment history, or total assets. While they don't affect your credit score, lenders may still consider factors like salary and total assets and balance them against your credit score to assess your risk.
How's your understanding of credit scores now? Take the CFA/VantageScore online quiz to find out.
Your credit score is one of the most important factors that lenders review when they consider your credit application – and how much to charge you for taking out credit. Be aware of your credit score and the factors that affect it and do what you can to keep it as high as possible. Treat your credit score like the valuable asset that it is.
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.