When it comes to your credit history, what you don’t know can hurt you. Your credit score is an important part of your financial identity and is an assessment of your past and present financial responsibilities. By understanding what credit is, how it works and why it’s important, you’ll be able to make the right decisions for your future.
We know credit can be confusing, so we asked five young adults what their top credit questions were. Keep reading to find out what they said!
Q: “Why do I have several credit scores? What is the difference?”
You may be surprised to find out that there are dozens of credit scoring models that lenders may use, each resulting in a slightly different credit score. The most used credit reporting agencies are Experian, TransUnion and Equifax. The good news is that these agencies look at similar factors when calculating your scores. As long as you make payments on time, keep your balances low and don’t open more credit accounts than you need, you should be in good all-around shape!
Q: “Why does a bad credit score lead to a higher interest rate?”
Your credit score allows lenders to understand your past spending behaviors so they can predict future behaviors and assess risk. A less-than-perfect credit score may be due to missed or late payments, high amounts of debt, or any other negative marks on your credit report. This can make you appear risky to a lender. If a lender decided to approve someone with a lower credit score, they will often give them a higher interest rate to mitigate that risk.
Q: “Will closing my paid-off credit cards help my score?”
If you are trying to increase your credit score, it is typically recommended that you keep all existing lines of credit open. When you close an account, you are reducing your total available credit—which can negatively affect your credit utilization ratio (what you owe vs. your total line of credit). The more credit you have available to you, the lower your credit utilization ratio will be.
Q: “Why does my credit score get dinged for each inquiry?”
First, it’s important to understand the two types of inquiries – hard and soft inquiries. A soft inquiry is a credit check that is not connected to any application for new credit and will not affect your score, such as checking your own credit score. A hard inquiry is when a lender checks your credit after you apply for a loan, credit card or other financings. These inquiries will appear on your credit report and may lower your credit score. While one might not be too bad, too many hard inquiries in a short period could suggest that you are racking up a lot of debt.
Q: “Should I use a credit repair company to improve my score?”
When your credit score is not where you want it to be, it may be tempting to hire someone to help boost it quickly. It may be frustrating but building a solid credit history does not happen overnight. The good news is anything a credit repair company can do you can do yourself for no extra cost! Here are a few ways you can improve your credit all on your own:
- Review your credit report yearly and check for mistakes.
- Always pay your bills on time.
- Continue to pay down your balances and aim for less than 30% credit utilization.
- Try not to apply for any new credit.
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