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When you apply for a credit card or a loan, your credit score is probably the most important factor in determining whether you will be approved or denied. A credit score is a three-digit number between 300 and 850, based on your credit history, whether good or bad.
Lenders and credit card companies use the score to determine your ability to repay loans and card balances. A good credit score is generally considered to be 670 or higher, but a lot depends on the credit score model. Bad scores typically range between 300 and 579, which is well below the national average FICO score of 714.
Unless you have a wealthy friend or relative willing to lend you money, you’ll probably need a good credit score to get a home or car loan. A good score will also usually get you a better interest rate. That’s why it’s important to keep a close eye on your credit score, whether or not you’ve had recent credit activity.
You can check your credit scores in several different ways. In fact, you might be surprised at the level of services you can get for free. For example, Chase Bank allows you to check your credit score through its Chase Credit Journey service — whether or not you have an account with the bank. The service is free and available on the Chase website. You can check your score as often as you like, and since the activity is considered a “soft” credit application, it won’t affect your credit score.
Once you have registered for Chase Credit Journeyyou’ll also have free access to a suite of tools you can use to help build your credit, such as identity monitoring, credit activity alerts, and personal information.
Understanding Your Credit Score
Because your credit score plays such an important role in determining your creditworthiness, it’s also important to understand the factors that go into determining the score. While the two major credit scoring services, VantageScore and FICO, vary slightly in how they weigh these factors, both generally emphasize the same components. For example, VantageScore calculates your credit score based on six main categories.
Here is a brief overview of each and the individual weight they carry in determining the overall score.
Payment history (about 40%)
Your payment history lets lenders and other creditors know how likely you are to make your payments on time, which is why it’s the most important factor in determining your score. If you miss payments or make them late, it will negatively impact your score. Conversely, building a record of on-time payments can help your score.
Length of credit history and composition of credits (about 21%)
This category tracks how long your credit cards and other lines of credit have been open as well as the different types of credit you have, such as mortgages, car loans, and credit cards. Lenders assess the average age of all your lines of credit when determining your credit score. Opening new credit accounts can shorten the length of your credit history and also reduce your score. Lenders also like to see a mix of different types of credit, so keeping your mix diverse will help your credit score.
Use of credit (about 20%)
Your credit utilization rate is the percentage of the amount you owe compared to your total credit limit for all cards and loans. For example, if you have a total balance of $1,000 across all your credit accounts and a total limit of $10,000, your usage is 10%. It’s best to avoid pushing your credit utilization above 30% so as not to hurt your credit score.
Total Balances and Debt (About 11%)
Having a lot of overall debt can negatively impact your credit score, especially if your debt-to-equity ratio is high.
Recent credit behavior and inquiries (about 5%)
Each time you open a new credit account, a “serious” inquiry will be added to your credit file, which can temporarily lower your score. It’s best to build your credit limit over time to ensure you don’t hurt your credit score.
Credit available (About 3%)
While not a major factor affecting your credit score, lenders want to make sure you don’t open more lines of credit than necessary.
Regardless of your credit history, it’s important to check your score regularly. Keep reading to find out why.
6 reasons why you need to watch your credit score closely
1. Identify errors
Check your credit score with a service like Chase Credit Journey ensures that your information is correct, up-to-date and competitive. If you see a sudden change in your score – especially one that lowers it – it’s possible that some sort of mistake has been made. If you see something that doesn’t belong on your credit file, contact the reporting company. To dispute an error on your score or report, contact the credit bureau that provides the report. The three credit reporting agencies are Equifax, Experian and TransUnion.
2. Monitor activity
Regularly checking your credit score can alert you to activities that may affect it, such as using your credit too much. In some cases, financial institutions can monitor your accounts for you.
For instance, Chase Credit Journey monitors all your accounts and alerts you to changes in your credit report that could affect your score. You’ll receive an alert whenever Chase sees new activity, including charges, credit inquiries, and new account openings. Chase will also notify you when it sees changes in your credit usage, credit limits and balances.
3. Assess your financial situation
Knowing your credit score can give you an idea of your overall financial health. For example, if you see a low score which may be due to a high credit utilization rate, this may be a sign that you need to focus on paying off debt. Or if you have made some late payments, a low score can motivate you to prioritize on-time payments and know due dates. Tools like a budget tracker and a payment schedule can help you take better control of your finances, and you can find many of these tools for free online.
4. Confirm payment history is accurate
A credit score that drops sharply in a short time may indicate that late or missed payments have appeared on your credit report. Lenders and creditors sometimes make mistakes when reporting your payment history, and you’ll want to correct those mistakes as soon as possible.
If you believe an error has been made, you should first check your credit reports with all three credit bureaus – Equifax, Experian and TransUnion – to confirm the error and determine if the inaccuracy appears in all three. If you notice an error, try contacting the lender directly. If the lender has made a mistake, they are responsible for updating the credit bureaus with the correct information. You can also file a dispute with one of the credit bureaus online or by mail.
Also, it’s important to make sure that any old information that counts in your score, including late payments, is removed from your credit report. Late payments should disappear after seven years.
5. Check for fraud
One of the great benefits of checking your credit score regularly is that it’s easier to spot fraudulent activity. For example, scammers can open a new account in your name without your knowledge. When this happens, file a dispute immediately. Some free services that allow you to check your credit score also provide identity monitoring and alert you to suspicious activity. Chase Credit Journey tracks any changes to your social security number, alerts you if your data is at risk of a breach, and monitors whether your information appears on dark web sites. Checking your credit score regularly makes it easier to identify fraudulent activity. For example, scammers can open a new account in your name without your knowledge. When this happens, file a dispute immediately.
6. Prepare for loan applications
Knowing your credit score tells you if you will qualify for a mortgage or another type of loan or credit. If you see a high score, you may feel more confident about completing an application. If you see a low score, you will need to take steps to improve it before applying for new credit.
How to monitor your credit easily and effectively
There’s a reason many people don’t monitor their credit score and credit activity as closely as they should. It takes a lot of time and effort to do all these steps correctly, one by one, on your own. But there is a more efficient way to do it. Chase Credit Journey is a free service that bundles the tools you need to perform all of these steps into one easy-to-use package. In fact, Chase does the hard work for you by monitoring your identity and alerting you to changes in your credit score. You are also free to check your credit score as often as you like without impacting your score.
Start monitoring your credit score more closely and enjoy the peace of mind (and maybe better interest rates!) that comes with it.
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