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Planning your financial future

6 factors used to calculate your credit score

It’s important to understand how your credit score works. Here's some of what the credit rating agencies use to evaluate your credit behavior.

Your proven ability to manage your money and meet your financial obligations is the basis of your credit score. And the more you know about what can affect it - both negatively and positively - the more in control of your finances you can be. But do you know what factors contribute to its creation?

The fact is, you actually have several credit scores. And while each credit reporting agency may emphasize different aspects of your credit, most are concerned about the following six factors:

1. Your credit card utilization rate

Lenders like to see that you can use your credit cards responsibly. Your utilization rate is based on how much of your total available credit you are using. For example, how many of your credit cards are at their maximum limit every month? The higher your credit card utilization, the lower your score. Many sources recommend getting your credit debt usage down to 30 percent of your available credit limit. However, the lower the balance, the better.

2. How consistently you make on-time payments

This is a factor on which your credit score is heavily weighted. Keep in mind that even one or two late payments can have a negative effect on your credit score. When you pay your bills on time, lenders view you as a responsible borrower.

3. Number of derogatory marks

A bankruptcy, foreclosure, tax lien, or other collection is an indication that you have a history of mismanaging your credit and can significantly hurt your credit score.

4. Average number of open credit lines

The amount of time your accounts have been open, averaged across all your accounts, helps creditors assess your creditworthiness.

5. Total number of accounts

Your number of accounts includes your credit cards, auto loans, mortgages, and other loans. In general, lenders like to see a good number of accounts on your report because it shows that other lenders have deemed you worthy of credit.

6. Number of hard credit inquiries

A hard inquiry occurs when a financial institution checks your credit report to make a lending decision. Since a lot of hard inquiries may make it look like you're in dire need of credit or aren't getting approved for credit, it's best to minimize how often you apply for credit.

Know your credit score

It's a good idea to check your credit report every year to maintain your good credit health. Review it carefully, look for discrepancies, and get them corrected as soon as possible. For more information, go to the Federal Trade Commission's website on credit. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies ( Equifax, Experian, and TransUnion ) to provide you with a free copy of your credit report, at your request, once every 12 months.

If you need additional tips on building good credit  or how to build a budget, visit the Protective Learning Center


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