Credit scores. Everyone has them. Everyone guards them jealously. But most don’t have a clue about what a credit score is. In short, a credit score is a calculation of a person’s ability and likelihood of repaying a cash advance for something. This calculation is shown as a number value so when lenders (banks) look at a potential borrower’s application to borrow money, they can see at a glance how risky it is to lend it.
What Affects My Score?
A common misconception is that once you use your credit, it goes away. Not so. Credit is like a person’s appetite. It will ebb and flow depending on the circumstances (or in this example, how much you’ve eaten). Scores will rise and fall depending on a variety of factors. One of the most important factors is how much you owe versus how much you make. Your debt to income ratio weighs heavily as a determining factor of your score. Once those two factors start to equalize or tilt in favor of the “how much you make” side, then a borrower’s credit usually goes up. For example, if a borrower had paid off a car, then their scores will go up because that monthly car payment is now gone—which means they have more money to spend and collateral (in the form of a car that they own) to put up. By contrast, if a borrower just bought a new car then the score goes down some because they just took on a payment and the car doesn’t yet belong to them.
How many lines of active credit you have also affects your score. Many people have a mortgage, car loan, multiple credit cards open at the same time. Having several lines of credit open is not necessarily a bad thing. But what can be bad, is having even one of those credit lines in a delinquency status. One late or missed payment can lower your score immediately. If you are having trouble keeping up with your payments, the best way to protect your credit score is to contact your creditor before you miss a payment. Many creditors may be willing to negotiate payment terms before you end up with damaged credit.