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What Affects Your Credit Score, and What Doesn’t

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You and the LawBecause companies use your credit score to decide whether to loan you money or offer you a credit card and what interest rate they will charge, it’s important to know what goes into compiling your credit score.

Businesses use different formulas to create a credit score from your borrowing and payment history. The higher your credit score, the more likely you will get a loan and pay a lower interest rate.

Your credit score can also affect your ability to buy affordable insurance.

According to the Consumer Financial Protection Bureau, a typical credit score evaluates:

  • Bill-paying history;
  • Current unpaid debt;
  • The number and type of loan accounts you have;
  • How long you have had your loan accounts open;
  • How much of your available credit you are using;
  • New applications for credit; and
  • Whether you have had debt sent to a collection agency, had a foreclosure or filed bankruptcy and how long ago.

Factors that improve your credit score are paying your bills on time, not borrowing too much or maxing out your credit cards, a proven track record of managing your debt, not opening a lot of new accounts in a short period, and having a variety of credit cards and loans when you do use credit to finance purchases.

Some things that do not affect your credit score are:

  • The amount of your income,
  • Your education level,
  • The amount of money in your bank accounts,
  • Overdrafts in your checking account, and
  • Carrying a balance on your credit card, so long as you’re making timely payment. However, the overall amount of your debt can affect your ability to borrow more money, regardless of credit score.

It is a good practice to check your credit report each year through to ensure that the information being used to compile your credit score is accurate. You are entitled by law to one free credit report a year from each of the three nationwide consumer credit reporting companies.

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