Learning how credit scores work can be a little challenging sometimes, especially if you are new to credit or building it for the first time. Building your credit should have some strategy as there are some rules on how to do it well. If you’re hoping to fine tune your credit, but haven’t seen growth in a while, you may be missing some lesser-known surprising facts. We’ll help you uncover some below!
1.Paying off or canceling a credit card can drop your score.
Canceling a card or paying off the balance completely can be a great way to reduce debt, however it may not reflect positively for your credit. Canceling your card can reduce your credit utilization which acts as the available credit you can use as a percentage. While keeping your utilization low can be good for your score – zeroing out is not. Additionally, the age (length of credit history) and types (credit mix) of your credit accounts are reduced when you pay off debt, so those are other factors that play into a dip in your score.
2. Having no credit is like starting at zero and it takes some time to build.
It may be difficult to finance the purchase of a car or home without a credit score, unless you have a cosigner. It’s not like having a low score where you have some possibility of approval. When you apply for a loan without any credit history, your lender has very little to base your financial repayment ability off of. That’s okay though! We have to start somewhere. Keep in mind, you can be great with money and have no credit.
It takes about six months of credit activity to generate a score, so keep that in mind when starting. It will take longer to get it to a higher score level, so just keep at it!
3. Having a high credit balance likely hurts your score.
This one shows us the flip side of #1, where if your credit utilization is above 30 percent, it can impact your score negatively. Essentially, a high balance could appear to lenders as you not having the funds you need so you have to charge your card. While this often isn’t the case, it’s how the numbers can be interpreted. This affects your amounts owed, which also makes up 30 percent of your credit score.
4. Our current credit scoring system began in 1989.
Credit started commercially in around 1841 with the first reporting agency, the Mercantile Agency. This model of credit was “used by merchants to see the creditworthiness of potential business customers” In the 1960s, financial institutions began using computerized credit scoring, marking a shift toward the more individual creditworthiness system used today. In 1989, the model we know today was built in which consumers could be scored more equally.
5. Credit Cards Offer Safety When Purchasing Online.
Credit cards can be a secure way to purchase something online. Plus, if someone does illegally obtain your credit card number, unauthorized payments can be relatively easy to stop and do not usually end up compromising as much as a stolen check or debit card. Now there are even ways for your card to be further encrypted to ensure even more safety. So next time you shop online, charge it, then pay it off!
We hope you’ve learned at least one new thing from reading this. Your credit score is a measurement used to assess your financial tendencies. However, it isn’t the only marker of your financial success, don’t get discouraged it takes time to learn the ins and outs. Sometimes it can get a little confusing, but if you’re willing to blend your financially savvy and learn the dos and don’ts of credit, you can find a winning combination.