If your personal finance knowledge were a pie, credit scores would be one of the most difficult pieces to swallow. That three-digit number can be confusing, so gaining a good understanding of the credit basics is important. It will give you a context for your credit score, and you’ll know what you need to do to improve your credit health.
Here are Credit Karma’s top three things you should know about credit scores.
There’s More Than One
Did you know that the credit score you may have purchased from one credit bureau isn’t necessarily the one that your mortgage lender, credit card issuer or auto loan originator will see? There are several different credit scores, even within the same credit bureau. Each of the three credit bureaus (Equifax, Experian and TransUnion) has its own proprietary credit score. And lenders can even look at different credit score models tailored specifically to the type of credit you’re applying for. You can read more about credit score differences in our blog post.
It Can Change for Many Reasons
Your credit score can be negatively impacted by a late credit card or loan payment, but it can also be affected by less obvious actions. If you close an old credit card account, you’ll reduce your available credit and shorten the length of your credit history, which can negatively affect your credit score. Additionally, applying for new credit can be beneficial to your credit score, but it can also decrease your credit score due to a hard inquiry. Confusing? Maybe. But you can use the Credit Simulator before you do anything to find out how your credit may be affected by different actions.
If you are one of those people that watch your credit score like a hawk, don’t fret over a small fluctuation in the numbers. As long as you’re keeping track of your credit and financial behavior overall, you should be able to pinpoint what’s affecting your credit score, help your score bounce back and take steps to keep improving it in the long run.
Individual Factors Are More Important Than the 3-Digit Number
When monitoring your credit health, you should focus on the factors affecting your credit score. There are six main factors in your credit score: open credit card utilization, percent of on-time payments, number of derogatory marks, average age of open lines of credit, total number of accounts and total hard credit inquiries. Check out each factor in your Credit Report Card, and see how you could improve each one to contribute to better overall credit health.
Some of these can only be improved with time. For instance, if you just opened your first credit card, it will take you some time to develop your credit history and average age of credit lines. If you have one delinquent credit card payment in your past, you’ll have to wait a while for that payment to no longer impact your score.
The best thing to do is to continue to make on-time payments, pay down debts and never let your credit utilization rise above 30%. Use the factors you can control to maintain and improve your credit health, and in the long term you’ll be on track for a great score.
Credit Karma™ is a completely free credit management service that provides free credit scores, financial education, and personalized savings recommendations. We help more than 3 million consumers realize the everyday cost savings of having a good credit score.