Understanding Your FICO Score
Before you apply for a loan, it’s a good idea to obtain a copy of your credit report. Your credit report shows how each of the three major credit reporting bureaus rates your credit. Since each bureau has its own method of analyzing your financial history, it’s important to look at all three scores. Ultimately, these ratings play a role in whether or not you qualify for a loan and what your interest rate will be.
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FICO scores, the model used by most banks and lenders, factor in your payment history as 35 percent of the rating and the amounts you owe as another 30 percent. The length of your credit history accounts for another 15 percent of the score while new credit and your credit mix each account for 10 percent of your score. FICO scores could differ because different bureaus collect different information.
FICO scores could differ because different bureaus collect different information.
Closing Accounts
Many people are surprised to discover that closing a credit account could have a negative impact on a credit score. When an account is closed, it could shorten your credit history or change your credit mix. If the ratio of used credit to available credit increases, this could also have a negative impact on your credit score.
Having Too Many Cards
It’s also detrimental to apply for a bunch of different credit cards. Each application results in an inquiry to your credit score, and too many inquiries is considered a risk. It’s also important to note that if you put a fraud alert or freeze on your credit, this has no impact on your credit score.
It's also important to note that if you put a fraud alert or freeze on your credit, this has no impact on your credit score. Click To TweetDo You Know Your Credit Score? Click Here to Check.
Opening or maintaining more than a couple of revolving credit accounts is also damaging to your credit. Revolving credit includes gas station and store credit cards issued by particular retailers for use at only that place. Store credit cards have more of a negative impact on your credit score compared to a debt such as a student loan, a car loan or a mortgage from a traditional lender.
Stay Informed
If you don’t know where you stand financially, it’s a good idea to obtain a copy of your credit report at least once per year. This report provides you with information that could allow you to take action and fix any errors found.
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