19 May

How does your credit behavior directly impacts your credit score?

Your credit history can play a vital role in your financial life because it’s used to calculate your credit score, which is a big factor that lenders consider when deciding whether to lend you money and at what rate. Your credit score can impact everything from getting a car loan to buying a home, so it’s important to understand how your credit behavior can affect your credit score. Take the quiz below to see how well you understand your credit score.

Question 1: You just made a $1,500 purchase on your only credit card, which has a $2,000 limit. This will impact your credit score because:

A. Your credit utilization ratio will change.
B. Your monthly payments will change.
C. The length of your credit history will change.

Answer: A. This purchase will change your credit utilization ratio, which is the amount of debt you are carrying compared with your available credit. It could impact your credit score because your credit utilization ratio accounts for 30 percent of your Equifax credit score. Ideally, you’ll use less than 35 percent of your available credit limit, or less than $700 on a card with a $2,000 limit.

Question 2: You pull your credit score and credit report only to realize that you have missed payments on your credit card for three consecutive months. This will impact your credit score because:

A. The interest is accruing on your credit card.
B. Your credit report will reflect that you pulled your own credit score.
C. Your credit report will reflect late payments.

Answer: C. A late payment will be reflected on your credit report, and your payment history accounts for 35 percent of your Equifax credit score. The credit reporting agencies (CRAs) look at how late your payments are, how much is owed, and how recently and how often you missed a payment. It’s important to pay every bill on time because one late payment can affect your credit score for up to two years. It also will remain on your credit report for up to seven years from the date of last activity or the date the account went 30 days late.

A high interest rate will impact your wallet but not your credit score. Pulling your own credit report will be reflected on your credit report but also will not have an impact on your credit score.

Question 3: You still have your very first credit card from college. You don’t use it very often, so you decide to pay off the balance and close the account. This will impact your credit score because:

A. The length of your credit history will change.
B. The balance is paid off.
C. You’re paying less in interest because you have one fewer card.

Answer: A. The longer you have had a credit account open and active, the longer your credit history will be. Lenders like to see that you’ve been able to handle credit responsibly over a long period of time. If you close the oldest account that you have, the length of your credit history, which accounts for 5 percent to 7 percent of your credit score, will change.

Question 4: You recently bought a house, and while you are shopping for new furniture, you decide to apply for store cards with several different retailers in order to get the discounts. This could impact your credit score because:

A. You will have more than one type of credit.
B. You will have opened several new lines of credit.
C. You will now be paying several monthly bills.

Answer: B. Your credit score reflects how much new credit you have as compared with the total number of tradelines in your credit file. New credit accounts for 10 percent to 12 percent of your credit score. While holding different types of credit can have a positive impact on your credit score, you may want to avoid opening several new accounts at once. New accounts can add recent inquiries to your credit file, which can impact your credit score for the next year. Opening new accounts can also reduce the average length of your credit history.

Your credit behavior directly impacts your credit score, but you might not be clear on why or how. Educating yourself on how credit works could help you take the right steps toward a better credit history.

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