What You Should Know About Your Credit Score
April 21, 2010— -- Credit scores can affect many aspects of your life, your ability to get a credit card, a mortgage and even a job.
But there are some surprising things that could hurt the all-important score, "Good Morning America" financial contributor Mellody Hobson explained.
Your credit score is determined by credit agencies that look at how you handle your credit and debt and then run that information through a complex calculation that determines your score.
The credit agencies look at five components when calculating your score: your bill paying history, outstanding balances and debt, how you have managed your debt over time, new credit card accounts and finally the variety of credit you have, such as a mortgage or student loans, and how promptly you handle those different kinds of bills, Hobson said.
But there are some surprising things that can negatively affect your score, such as the Home Affordable Modification Program, Hobson said.
The program is supposed to help you reduce your monthly mortgage payment so you can stay up-to-date and prevent foreclosure. But the problem is when you apply for the modification, your lender essentially tells the three credit reporting agencies that you are having trouble with your mortgage, Hobson said, and therefore people's scores have dropped considerably because of it.
But Hobson said that the possibility of a hit on your credit score should not stop you from applying for a loan modification, because the dip would be much less hurtful than a foreclosure, which could ruin your credit rating and stays on your record for seven years.
Closing a credit card could actually hurt your credit score, Hobson said. That is because it changes your credit utilization rate, which is a measure of how much credit you use.
For example, if you have two credit cards, one with a $200 limit and another with a $300 limit, then your total available credit is $500, Hobson said. If you are carrying a $100 balance on the card with the $200 limit, then you are using 20 percent of your available credit, which is your credit utilization rate.
