#happylife: Breaking down credit scores and tips for how to improve them

#happylife: Breaking down credit scores and tips for how to improve them

As important to your overall financial picture as they are, the folks at STCU say that credit scores are often ignored until when they are needed, and at that point it can be too late.

Your credit score is the number that lenders use to determine whether or not to give you a loan, and at what interest rate. Your credit score can fall between 300 and 850 and the higher the better, when it comes to more favorable interest rates.

According to STCU, three independent agencies collect your information and formulate your scores. Those agencies are Equifax, Experian and TransUnion and each uses a different model.

Overall though, the amount of money you owe and how much of your credit limit you have used accounts for 30 percent of your score, your payment history (on time, if late, how late) accounts for 35 percent of your score, your credit history accounts for 15 percent, types of credit and types of debt 10 percent, and how many credit requests you have made and how many reports have been pulled on you, 10 percent as well.

“Certain things have greater impact than others,” said Sherry Wallis, a spokesman for STCU, “for instance if you are 30 days past due on a bill, that could drop your credit score over 100 points, if you have a bankruptcy it could drop up to 240 points.”

Other potential impacts include:

Maxed-out card: 10-45 points
Debt settlement: 45-125 points
Foreclosure, short sale or deed-in-lieu: 85-160 points

So how can you increase your score?

“Depending on what your credit history looks like and the things you have to improve upon it could take weeks, months or even years,” said Wallis.

She says things you can do include, making sure you pay your bills on time, making sure you don’t open multiple new credit accounts in a short period of time, as that can indicate risk. Maintaining a variety of accounts is also viewed positively, things like a mortgage, installment loan, retail and bank credit card, and other unsecured loans.

Closing accounts can also impact your credit score, and STCU advises keeping your oldest accounts open, if its practical to do so. History can show reliability.

Getting a co-signor can also mitigate risk for loans, if you need money and can’t wait to build up a better score, as can asking for secured or collateralized ones.

She recommends checking your credit report and credit score once a year, which can be done without penalty. STCU recommends using sites like myfico.com (which may have fees) or free sites like Credit Karma, or Quizzle.

She says checking your own score, in what is called a soft inquiry, will not impact your credit score. Additionally, employer and insurance inquiries won’t impact it either.

Hard inquiries, like when you are applying for new credit will however could lower your score.

If your credit score is poor, it might not be an end all for getting a loan though.

“What you have to remember is that lenders look at a lot of things, they are going to look at your current work history, your employment, your current debt to income ratio and that credit score,” she said, “but that score carries quite a heavy weight in regards to what they are going to loan you and at what rate.”

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