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Money Talks | What decides your credit score?

Many different elements go into making up your credit score and you'll need to understand what drives that score up and down in order to save money!

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Credit scores; You've got one. 

You might not even know what it is, but when it comes to you qualifying for a loan, like a car loan or a home loan, you have a credit score. In turn, your credit score reflects the odds of you paying back a loan and how much interest you should be charged.

So what composes your credit score and why is a credit score so important? 

Certified Financial Planner Neil Vannoy told 6 News, "Credit scores have a huge impact on our lives. When applying for credit, our scores will determine the interest rates that we pay, so a low score could lead to paying thousands more in interest over time."

Vannoy said it's not just loans that are impacted. 

"In addition to getting credit, credit scores can impact our ability to get homeowner's insurance, auto insurance, cell phone service, rent an apartment, or even get a job," he said.

So, when it comes to those credit cards, car payments and mortgages, what is the most important thing for establishing good credit? 

"Paying your bills on time will have the largest positive impact on your credit score. Even a single 30-day late payment can lower your score by 100 points or more," Neil said. "Setting up automatic payments on loans and credit cards can help you avoid missing a due date."

And remember, starting good habits tomorrow will eventually pay off and raise your score. 

"An older credit file will be more stable, so it's important to keep old, good accounts on your file even if you're not using them anymore," Neil said. 

"To have a high score, you want to make sure you're not using more than 10% of your available credit at any time," he added. "So, if you have a credit card with a $10,000 limit, you never want to have a balance on it larger than $1,000."

Neil said avoid canceling old accounts unless you haven't used them at all for over two years, as well. 

"It might feel good to close a credit card with a balance on it to stop you from charging more on it, but this lowers your overall available credit limit and the amount you owe will still count against your utilization ratio," he said. "It's better to just tear up the card while you pay it off."

And one more tip, you don't want to have your credit checked too often! 

Neil says, "Applying for new credit is known as a 'hard inquiry,' which can have a negative effect on your credit rating for up to 12 months."

Neil went on to say you should have a mix of credit – The remaining portion of your score has to do with your credit mix. It's good to have different types of credit like a credit card, car loan, and mortgage since they each affect your score differently.


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