6 Things You Should Know About Credit Scores

credit score facts

As an adult, fewer numbers are important to your financial wellbeing than your credit score.

Well, you could say your phone number is the most important, but what is the worst that can happen if you were to lose your number for good? You could lose a couple of contacts, yes, but you can easily get another line and life will move on.

But your credit score? You can’t lose it. It can only go higher or lower, but it’s uniquely yours. It wields a lot of power over your financial life.

Check out these credit score facts to learn more about personal finance.

1. You Need to Be Credit-Active to Have a Credit Score  

If you don’t know much about credit scores, you probably think anyone with a bank account, or any anyone who has reached the legal adult age, has a credit score.

Well, the fact is the vast majority of adults do indeed have a credit score. However, some don’t have it. This is because, typically, you need to be a credit-active consumer to start building credit.

So, if you’ve never taken out a loan or applied for a credit card, chances are high you don’t have a credit score. If you’ve got no credit, you can secure a credit builder loan or apply for a secured credit card. Once you start paying off the credit facility, credit bureaus will pick up the information and start scoring you.

2. There Are Different Credit Scoring Models

You’re probably wondering who has the power to assign you’re a credit score, right?

Your credit score is the result of a credit scoring model. This is a statistical software or system that assesses your financial habits and awards you a 3-digit score ranging from 300 to 800. A lower number means your credit is poor.

Now, there are a couple of credit scoring models in use, but FICO is the most popular, followed by VantageScore. Over time, scoring models have harmonized their algorithms.

In the UK and the US, there are three major credit bureaus: Equifax, Experian, and TransUnion. 

Regardless of the scoring model any of these bureaus uses, there won’t be a major difference in your credit score.

Not convinced? Just request a copy of your credit report from at least two of these bureaus and see what you find.

3. Your Payment History Contributes 35 Percent of Your Credit Score

As far as credit scoring is concerned, your payment history is your record of loan and credit card repayments. This record has a big impact on your credit score.

Let’s say you have an auto loan and two credit cards. If you’re always paying your monthly loan installment on time and settling your credit card balances before the last day of the billing cycle, you’ll build a positive payment history. Your credit score will keep rising.

In some instances, your utility bill payments can also go into account.

This means that if you’ve got a bad or poor credit score and you’re looking to bring it up, your focus should be on your payment history.

Your credit utilization ratio comes second in terms of credit score impact. This is the amount of credit you’re using against your limit.

When you use up more than half of your available limit every month, your credit score will start falling. Credit scoring models want you to keep your utilization rate below 30 percent.

For more information on how to achieve and maintain excellent credit, check out our Finance section.

4. Your Credit Report Can Be Erroneous

A vast majority of consumers never bother to check their credit reports for errors. They are just interested in their score.

Yet, in the United States, a recent survey established that about 1 in 5 credit reports have a significant error. This is an error that has an influence on your credit score.

Some of the most common errors include:

  • Duplicate accounts
  • Name misspellings
  • Inaccurate account balances
  • Information on ex-spouse accounts
  • Incorrect payment statuses.

Combing through your credit report for errors is important especially if you’re on a mission to build your credit score. Finding an error, such as duplicate accounts, and getting it fixed, can make an impact on your credit score.

5. Some Events Stay on Your Credit Report for Several Years

If you default on a loan and the account goes into collections, you’d be forgiven for thinking that paying it off is enough to get it off your credit report.

A collections account will stay on your credit report for seven years, whether you pay it or not. The same goes for a car repossession and house foreclosure.

Then there’s bankruptcy.

While chapter 13 bankruptcy will fall off your report after seven years, chapter 7 stays for 10 years, depending on the nature of your debt.

Any of these events will have a major impact on your credit score. If your credit score was excellent prior to filing for bankruptcy, for instance, it can easily fall to below average. This is why you should always avoid getting into debt unless you’re sure that you can service it fully.

6. Checking Your Score Doesn’t Hurt Your Credit

When you apply for a bank loan or credit card, the lender will check your credit score. This is known as a hard inquiry and it will negatively affect your credit score. The more the hard inquires on your credit, the lower the score will fall.

However, if you’re checking your own score, you will be making a soft inquiry, which has no impact on your credit score.

Know How These Credit Score Facts Can Affect You

A good credit score is key to a good financial life. It's a fact of life as certain as death and taxes. You’ll get loans at cheap rates, landlords won’t reject your tenancy application, and you won’t be disqualified from certain jobs because of credit requirements.

Now that you’ve brushed up your knowledge with these credit score facts, what’s stopping you from having the best score? Nothing!

Keep reading our blog for more credit tips and credit score facts. Visit the Loan and Finance sections of the Bootstrap Business Blog right now for additional articles and insight!

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