When you’re rebuilding your credit after bankruptcy or another financial hiccup, education is key. It’s hard to understand how to improve your FICO score if you don’t know the language of credit. Today we look at some terminology. School is in session!! Here are 15 credit score terms you absolutely must know.
This is the quick way to refer to an annual percentage rate. It’s the interest rate that you’ll be charged on your mortgage, car loan, or credit card balances carried over from month to month, over the course of the year. Depending on the finance agreement, it can be compounded daily, weekly, or monthly basis.
Average age of credit
This is one of the five critical components of your credit score. The average age examines how long you have had all your accounts open as an average. The higher the number, the better for your score. To check, add up how long each credit card account has been in existence then divide by the number of cards to get the average!
The credit reporting agencies that maintain credit reports are called bureaus. These include Equifax, TransUnion, and Experian. Many (but not all) of your creditors report your activity to the bureaus. Some report to only one or two while some report to all three. The bureaus should keep accurate information on which your credit score calculation is based.
Your credit report is the log of your credit history. It is an account of how you have managed credit over the past several years. Once accounts go inactive, they eventually fall off the report and no longer affect your credit. Accounts that are active, in good standing or bad, or in collections, are all part of your history. Most items stay seven to 10 years on your report after they close.
A credit inquiry occurs when you apply for a new line of credit such as a credit card, store account, or loan. Every time you apply, there’s usually a “hard” inquiry on your credit report. A hard inquiry will lower your score just a bit. Too many hard inquiries in a short period can negatively impact your credit score. A “soft” inquiry which is often used for pre-screening doesn’t drop your score.
This is a detailed document of your credit history and is used synonymously with the other phrase. It’s not your credit score, but the information on which your score is based. It’s kind of like a report card for your financial behavior. Keep it clean and in good standing, and you should have a healthy credit score.
Your credit score is a three-digit score, calculated from any one of a thousand (or more) algorithms to display your creditworthiness. It generally ranges between 300 and 850 depending on the nature of the score calculation. A low score means lenders won’t feel confident that you’re a good credit risk. A high score inspires confidence.
Also known as a negative item, these are items you want to avoid. They tarnish your report and lower your credit score. Debt collection activity, foreclosures, and tax liens all fall within this category. If you can get derogatory items (another turn of the same phrase) off your report, it can boost your credit score.
The Fair Isaac Corporation (FICO) is one of the largest purveyors of credit score calculations. There are at least 50 different FICO calculations plus ones marketed by other companies. The term “FICO score” has now become synonymous with “credit score” even though not every credit score is a FICO score.
Also called an installment loan, it’s a financial arrangement where you pay the same payment at set intervals, often on a monthly basis. You are expected to keep paying at those intervals until you pay in full. An example of installment credit is a traditional mortgage or a car loan.
If you fail to pay at least the minimum required payment on your debts on the agreed upon date, you will likely be charged a late fee for missing a payment every time it happens.
This is also called a default rate. It is levied by a credit card company as a punishment for not sticking to the terms of the agreement. These rates are usually buried in the terms and conditions of your finance agreements.
This is a type of credit that does not have a fixed number of payments or fixed payment amount. It contrasts with installment credit with a set schedule and dollar amount. Credit card and store cards are prime examples of revolving credit accounts.
This ratio tracks how much of your credit you’re using compared to your total credit limits. Low credit utilization does your credit score good. If you’re using more than 20% of your credit lines, you will start to see a diminishing effect on your credit score.
Now that you’re armed with this information, you’re ready to get to work. To find out more about re-establishing credit or improving your score, check out our Credit Score Keys program.