Knowing some simple facts about credit can go a long way toward helping you develop great financial habits and staying on track.
Here are some top credit facts to keep in mind as you build and maintain your credit (for more information on credit, download our free e-book, Building Blocks of Credit):
- Many times, a good credit score is more important to lenders than a high household income.
- Every person over the age of 18 in the United States has a credit score, even if they don’t have credit cards or loans.
- Bill collection actions prompted by non-payment could stay on your credit record for seven to 10 years. That’s why it’s important to establish good credit history and make sure you don’t go into collection.
- Canceling a credit card account doesn’t usually result in an improved credit score; in fact, maintaining a credit card with a zero balance often provides a boost to a credit score.
- Although lenders consider your credit score during loan applications, it’s not the only factor: they also look at your income, employment history, credit history, and any extenuating circumstances that may have led to a challenging credit situation.
In the Fair Isaac Corporation (FICO) method of calculating credit scores:
- The largest part of a credit score is payment history, which means it’s vital to make sure you pay bills on time and pay the minimum amount at least. If you pay less than the minimum, the credit card company can report it as a missed payment.
- Applying for new credit accounts impacts about 10 percent of your credit score, even if you don’t use the new credit card or loan. Frequent applications for new credit can hurt your score, so make sure you really need that card or loan before applying.
- Thirty percent of your credit is based on a debt-to-credit ratio, which is the amount you owe compared to your combined total credit limit. So if you have a high credit limit but keep balances low, that can help your score.