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 major role in whether or not you qualify for a loan and what your interest rate for that loan might be.
FICO scores, the model used by most banks and lenders, factor in:
- Your payment history as 35 percent of the rating
- The amounts you owe as another 30 percent
- The length of your credit history accounts for another 15 percent of the score
- New credit and the type of credit mix you have on each account for 10 percent of your score.
However, FICO scores could differ because different bureaus collect different information.
Many people are surprised to discover that closing a credit account could have a negative impact on their 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 have a negative impact on your credit score.
Having Too Many Cards
It’s also detrimental to apply for too many different credit cards. Each application results in an inquiry to your credit score, and too many inquiries is considered a risk. Note that if you put a fraud alert or freeze on your credit, this has no impact on your credit score.
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.
If you don’t know where you stand financially, it’s not too late to start. Typically, you’ll want to obtain a copy of your credit report at least once per year to check on your financial health. This report will provide you with all the information you might need to allow you to take action and fix any errors you find.
When is the last time you checked your credit score? Click here to check your credit score today.