Credit Score Works

Simply put, having a good credit score will save you money. If you have a good credit score, you’ll be able to negotiate the best rates on loans. This may include car loans, mortgages, student loans, or any other type of loan. Someone with a high interest rate on a loan will have to pay more money during the life of the loan. Someone who has a low interest rate will end up paying less money over the life of the loan.

According to FICO, there are 5 metrics that comprise your credit score:

35% Payment History – If you pay your bills on time, your score improves. If you pay them late, your score drops.

30% Credit Utilization – You should aim to use about 10 percent of your credit limit every month, but no more than 25 percent. This will keep your credit utilization ratio in good standing. Also, do not close your credit card accounts unnecessarily because this will adversely affect your utilization ratio.

15% Length of Credit History – The longer you have a credit history, the better your score. It’s important to constantly use your credit cards from month to month to keep them revolving. If you don’t use them, your account will be shut down and your history will be impacted.

10% Types of Credit – Lenders want to see that you have a well rounded borrowing history, so it makes sense that 10 percent of your score is affected by having different types of loans.

10% Recent Searches for Credit – A hard inquiry affects your score. A hard inquiry is when you apply for credit through a lender. If you shop for a car and are trying to get an auto loan, don’t worry about shopping around for a rate. FICO has an electronic algorithm in place that detects this, and you will not be penalized for rate-shopping within a 2-4 week period.

Bottom line, no. You cannot hurt your credit score by inquiring about it. However, your credit score will fall if you apply for credit too much. For example, your score is affected if a lender checks your score when you’re applying for a loan.

You can obtain a free copy of your credit report every year from AnnualCreditReport.com. It’s important to check up on the health of your credit every year. You should check to see if it’s improving. You’ll also be able to find out if you’re a victim of identity theft.

Having healthy credit takes discipline, but it can be done. Practice the tips outlined in this post and you’ll be well on your way to financial independence.