Credit Score Lingo You Must Understand – When Rebuilding Your Score, Knowledge Is Key

It pays to know your credit terms
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Finances and credit scores are something we all deal with, but sometimes the words and phrases that get thrown around might be confusing. Even if you think you know what a certain term means, you might be wrong. Lack of knowledge can cost you. Today we’ll take a look at some of the most common terminology about credit and credit scores that you should know.

Hard Inquiry (Hard Pull) Versus Soft Inquiry (Soft Pull)

You may have heard the phrase “hard pull” or “soft pull” or “hard inquiry” and “soft inquiry.” All these phrases refer to a creditor checking your credit. If you apply for a credit card or loan, the creditor will run a hard inquiry. What that means is, with your consent, they request your credit score to assess you.

A hard pull registers on your credit report and can temporarily lower your credit score. Get too many hard pulls in a row and your score can suffer. A soft pull, by comparison, occurs when a creditor pre-screens you for an offer or you check your own score. It doesn’t affect your credit score.

Revolving Versus Installment Credit

One of the components of your credit score is your mix of credit. This means the different types of credit you have. Generally, a variety is better, but this won’t make or break you so long as you’re handling your credit responsibly. Installment loans are things like a car loan while revolving credit is a credit card.

With an installment loan, you make a predefined payment on a set schedule with a start and end date. Credit cards, store credit, and lines of credit are considered “revolving” because you use, you pay, you use again – it revolves. Revolving credit usually carries higher interest rates than installment loans.

Interest Rate

Interest rates can be tricky to understand. “APR” stands for annual percentage rate and is the percentage of interest you pay for a particular line of credit or type of credit during a year. Credit card APR is trickier because of the effect of compound interest (interest paid on interest).

For instance, your credit card APR might be 20%, but if you buy something and don’t pay it off the same month, you’ll accrue interest. That interest is tacked onto the balance you already had, and the following month, if you don’t pay it off, you’ll pay interest on the initial purchase and interest on the interest.

Credit Utilization

Utilization means use and this significant part of your credit score is calculated by looking at how much you owe on your credit cards compared to your total lines of credit. If you owe $500 total across all your cards and your total credit lines across those cards is $5k, that’s 10% utilization.

You just take 500, divide it by 5000 and you’ve got your answer. If you go over 25-30% utilization, your credit score will be negatively affected. Also, if you max out one card while still leaving your overall utilization low, that’s still not a good idea. Maxing out cards should be avoided.

Credit Score Versus Credit Report

People say, “I want good credit” and this usually means you want to be able to borrow when you need to, obtain lines of credit you need, and when you’re ready, buy an auto or home at a reasonable interest rate. It’s also critical to know that your credit score and credit report are not the same thing.

Your credit report is a comprehensive roster of your credit activity over the past seven to 10 years. This shows your payment history, balances owed, paid off accounts, closed accounts, negative items, etc. Your credit score is calculated from the data on your credit report.

It’s important to understand the language of credit as you work to improve your credit score and financial future. To find out more about improving your credit score after bankruptcy, contact Credit Score Keys. Call 919-495-2365 today for a free initial consultation.