You may have wondered at some point in your financial journey how your credit score is calculated. This number acts as an adult report card and is used by potential lenders to determine your risk. It affects the loan products and interest rates you qualify for. Some 90% of top lenders use FICO when making lending decisions. Understanding the formula used to come up with your FICO score is even more important than knowing the actual number. The data used to calculate the score comes only from your credit report —both positive and negative information — and falls within five categories.

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Necessary parts of life such as applying for a car loan, credit card, lease or mortgage can impact your credit report. On the surface, any of these actions are not negative from a credit perspective. However, depending upon the number and recency of the inquiries you initiate against your credit, as well as other variables, inquiries might have the net result of driving your credit score downward. That’s why we suggest no more than three inquiries in a 6-month period. The kind of credit you carry also plays a part in your score, with installment debt having a less negative impact than revolving debt. Other more obvious items such as late payments and collection accounts can significantly affect your score for the worse.  

You’re entitled to request a free copy of your credit report from AnnualCreditReport.com once every year, from each of the three major credit bureaus — Experian, TransUnion and Equifax. These credit bureaus receive credit-related information from companies you have debt and credit with. They also pull public records like a tax lien and bankruptcy. Viewing and verifying this detailed information from the credit bureaus allows you to know where you stand from a credit perspective, and also to ensure the information contained in each of your credit reports is accurate. Inaccurate or unfamiliar information can be an indication of fraudulent activity or identity theft.

To maintain a healthy credit profile:

  • Double check each of your three credit reports to verify that you recognize all credit inquiries. If you see something suspicious, freeze your credit with a fraud alert while you investigate further. Each of the three bureaus has a different process for handling fraud as well as more straightforward errors, but they should gladly help you through the process.
  • As much as possible, make more than the minimum payment toward your debt each month. Be sure that payments are on-time or early. If you find yourself having a hard time making minimum payments or keeping up with the multiple bills, it might be time to think about consolidating your debt into one fixed APR payment.
  • Be careful about how frequently you apply for credit. Don't fall prey to the tempting habit of opening a new store card just to take advantage of the promotional discount or other perk. You'll end up with far more credit accounts than you need, and potentially more temptation and open-to-buy than you can safely handle.
  • Age of established credit matters. It's ok to go ahead and cut up or put away the credit cards you don't use, but don't close those accounts. The longer your credit lines are open, the better it is for your credit score. For example, keeping a store credit card open and paid on time for 10 years is far better than opening a credit card for a couple months, paying off the balance, and then closing it.

The bottom line on credit scores is this — there is no magic bullet for hitting a target number. It’s a lot like physical fitness and weight-loss, career success, and so many other positive achievements we strive for. How to achieve these goals varies with each individual. Building and maintaining a strong credit score takes informed, careful choices, determination and good habits.

Should you need it, here is contact information for all three of the major credit bureaus: Equifax- www.equifax.comP.O. Box 740241

Atlanta, GA 30374-0241

1-800-685-1111 Experian- www.experian.comP.O. Box 2104

Allen, TX 75013-0949

1-888-EXPERIAN (397-3742) TransUnion- www.transunion.comP.O. Box 1000

Chester, PA 19022

If you need help consolidating debt and taking control of your credit score, we can be of help. Check rates

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