Understanding Your Credit Score

Understanding your credit score is important for a number of reasons. If you’ve been researching how to buy or lease a car, you’ll know that car loans for people with bad credit depend on what your credit score is. If your score is below 600, you’re considered to have a low credit score in the eyes of lenders. It’s important to know what hurts your score, so you can avoid damaging your credit further.

Different aspects of your credit history go into the culmination of your overall credit score. When you look up your credit report, you’ll see payment history, what credit lines you have open, and if any are delinquent. Requesting and reviewing your credit report once a year helps you understand where your credit score is and lets you take steps to improve it, if needed. And remember, you have the right to a free credit report once a year from any of the major credit bureaus.

Your credit score, also called a FICO score, is broken down into different categories. The first category is payment history. This is big. You need to make sure you make payments on time. This ties in with what you owe. If your credit lines are stretched to the max, that hurts. You want to keep what you owe as low as possible. Once you have established credit, the length of your credit history matters. It’s great to start building good credit when you’re young and have less financial responsibilities. The last factors are your types of credit in use and amount of new credit opened. Having a mix of credit accounts actually helps your credit score. Opening too many accounts in short time however, does not help your score. Now let’s look at a couple potentially damaging factors to your credit.

Having no credit can actually hurt you. If you haven’t established any credit, you haven’t shown that you can manage your finances and credit line. If you have no credit, it can help to open credit lines, use them once or twice, pay them off, then let them sit in good standing. That establishes your credit and automatically gives you good score over time.

Bankruptcy is detrimental to your credit rating, but not completely crippling. Bankruptcy occurs if you’ve made late payments and possible had to deal with collection agencies and have no way to repay what you owe. Even if you’ve filed for bankruptcy, you still may qualify for an auto loan. Bankruptcy can be looked at as a fresh start and is an opportunity to rebuild your credit from the ground up.