Getting Smarter About Your Credit Scores

Posted by cskadmin on September 6, 2012

Over the past year, consumers’ knowledge about credit scores and what they can mean to their overall  financial outlook has improved significantly, but there is still much room for improvement.

Americans have become more informed about certain aspects of their credit scores during the past year,  but most still don’t know enough about the risks associated with low scores and alleged “credit repair” services.1

A large majority of consumers now know many of the most important facts about credit scores. For example:

  • Mortgage lenders and credit card issuers use credit scores.
  • Many other service providers also use these scores — landlords, home insurers, and cell phone companies.
  • Missed payments, personal bankruptcy, and high credit card balances influence scores.
  • The three main credit bureaus — Experian, Equifax, and TransUnion — collect the information on which credit scores are frequently based.
  • Consumers have more than one generic score.
  • Making all loan payments on time, keeping credit card balances under 25% of credit limits, and not opening several credit card accounts at the same time help raise a low score or maintain a high one.
  • It is very important for consumers to check the accuracy of their credit reports at the three main credit bureaus.

However, most still falsely believe that credit scores are influenced by their age (56%) and marital status (54%), while 21% think ethnic origin plays a role in determining their scores. And approximately half  (51%) are under the false impression that credit repair companies are typically helpful in fixing errors and improving scores, even though such firms often charge high prices to perform services that consumers could do on their own.

What You Can Do

A typical credit score will range between 300 and 850 points. Although all lenders make decisions based on the particulars of the lending situation, generally speaking, the higher your score, the lower the perceived risk to the lender, and the more attractive the interest rate you will be offered.

A few tips for raising or maintaining a higher credit score include:

  • Pay your accounts on time and keep your balances low. Lenders are looking for a proven track record of making timely payments. Payment history determines about 35% of your credit score.
  • Be conservative in the amount of available credit you use at any given time. About 30% of your score is determined by what the industry refers to as your “utilization ratio,” which is the amount you owe in relation to the amount of credit available to you. If that percentage is more than 50%, your score will be lower.
  • Hold on to older, unused accounts. The longer an account has been open and managed successfully, the higher your score will be.
  • Maintain a diversified credit mix. If you hold an auto loan, a home mortgage, and credit cards that are well managed, you will generally have a higher credit score than someone whose credit consists mainly of finance companies.

1Source: The Consumer Federation of America, May 2012.

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