An important factor affecting what you pay for credit is your credit score. This is a number assigned to you by the three largest financial reporting firms and referenced by potential lenders as an indication of your creditworthiness. In general, the more creditworthy you are seen to be, the lower the interest rates you may be charged for credit. The opposite is true, too. The less creditworthy you are seen to be, the higher the interest rates you may be charged. A low credit score can even disqualify you from certain security clearances. You may find out what your current score is for a nominal fee, and receive a copy of your credit report on which your score is based, free of charge, once a year. It’s a good idea to keep an eye on your credit score and try to avoid financial behavior that can lower it.
In general, the factors that determine your credit score fall into these five categories:*
Payment History – Paying bills late can have a significant adverse affect on your credit score, so always pay bills on time, if possible. If you realize in advance you are going to be late making a payment, contact the creditor to see if you can work out a new payment schedule. Being in default on an account can be even more damaging to your credit score.
Length of Credit History – Generally, the longer you have used credit responsibly and paid your bills on time, the more creditworthy you will be considered—hence, the higher your credit score. For this reason, some advisors recommend that you keep your oldest credit accounts open, even if you are no longer using those accounts, so that the full length of time that you’ve been using credit appears on your credit report.
Percentage of Debt to Available Credit – In general, the more credit you have available to you that you are not using, the more creditworthy you will be considered. This is another reason why some advisors will tell you to not close credit accounts, even if you don’t plan to use them.
New Credit – If more available credit tends to raise your score, why not just open new credit accounts, even if you have no intention of using them? The problem is, opening new accounts can, at least temporarily, lower your score. Likewise, credit inquiries from prospective creditors can also lower your score, even if they don’t result in new loans or lines of credit. Therefore, if you’re financing a large purchase, such as a car, and shopping around for the lowest rate, do so within a short period of time. This will be more likely to be interpreted by those reviewing your credit as shopping for a single loan, rather than for multiple loans.
Your Credit Mix – Generally, using a mix of different types of credit is better than using only one type. This shows that you know how to handle different types of credit. Likewise, carrying debt on installment loans, such as a Community Bank Signature Loan, may be looked at more favorably than carrying debt on a credit card.
*"How Your FICO® Credit Score is Calculated," http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx, accessed on October 5, 2009.
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