Credit can be a powerful financial asset to have on your side, making you more attractive to lenders and enabling you to secure better rates on loans you might need. But having good credit (and more specifically, a good credit score) is something that is achieved, not something that is simply provided or assigned to you.
Credit plays a significant role in your financial life, and you likely were familiar with this already. However, perhaps you were less familiar with the amount of control you have over your credit score. It all comes down to your financial behaviors. This is why understanding the ins and outs of credit is so crucial.
Think of it this way—your financial behaviors (past and present) serve as the building blocks that make up your credit score. Let’s break down exactly what those building blocks look like, so you can get started building up your score today.
What is your credit score?
Your credit score has nothing to do with your income. This is important to remember, as many consumers think they need to boost their income to improve their credit score. While increasing your income never hurts when it comes to reaching your goals, this alone will not improve your credit score. You could have a generous income but still have a low credit score.
Simply put, your credit score is a number which is the result of a mathematical formula that considers your debts, your history of payments, and other factors. So, you might be wondering, why does this matter?
There are three major credit bureaus that monitor and collect your financial information. Those agencies are TransUnion®, Equifax®, and Experian™. Each monitors your financial activity independently, and while they are often grouped together, they are in fact three different companies. And yet, they are each relied on to provide financial information to creditors.
And while some creditors might weigh aspects of your financial information differently, the FICO® (Fair Isaac Corporation) scoring model is widely accepted by most financial institutions. That scoring model looks like this:
800 – 850: Excellent
740 – 799: Very Good
670 – 739: Good
580 – 669: Fair
300 – 579: Poor
But what, exactly, goes into a credit score? How does the equation work to arrive at these numbers?
How is the score calculated?
Here is a breakdown of what impacts your credit score:
Payment history
Total amount owed
Length of credit history
Types of credit
New credit
Though these are all factors that dictate your score, they are not all weighed evenly. For instance, your payment history accounts for 35 percent of your score, taking into consideration the overall timeliness of your past payments. Meanwhile, the total debts you owe account for 30 percent of your credit score and compare how much you are borrowing with how much you are eligible to borrow.
The type of credit you’re borrowing accounts for 10 percent of your score and factors in all types of credit, including everything from car payments to mortgage payments to student loan debt to ongoing credit card balances. New credit also accounts for 10 percent, and considers how recently you have applied for new credit, whether in the form of a loan or opening a new credit card.
How do I check my score?
Before improving your score, you need to know what it is now. Whether you are looking to save up for a big purchase and want to make sure you have enough good standing to secure a loan, or whether you are simply trying to get your financial behaviors in a better place, knowing your credit score is the place to start.
Monitoring your credit is easier than ever. There are services that provide free credit reports online, making it easier than ever to obtain. For instance, you have access to one free credit report a year through the website freecreditreport.com.
The website annualcreditreport.com acts as the official hub for Equifax, Experian and TransUnion. This site enables you to check for errors on your report, but it does not provide a credit score. You have the ability to purchase a full report that includes your most up-to-date credit score from one of the three credit reporting agencies.
You might have heard that by checking your score you are at risk of lowering it. This is not necessarily the case. In fact, you should be checking your score from time to time to monitor your progress. The credit bureaus provide a limited number of free reports a year to check your score and to review your report for potential discrepancies.
Checking your own credit score is referred to as a “soft” inquiry, which means your credit score itself is not going to be impacted by requesting such information. What will impact your score is a “hard” inquiry. This occurs when lenders check your score because you are requesting an additional line of credit, for instance. However, if you are considering purchasing a house, it’s likely you will check various lenders’ offerings. This will be taken into consideration, and you will not be “docked” for each inquiry made, as there is usually a window of time you have for making several back-to-back inquiries.
How do I improve my score?
Once you’ve checked your score and know where you stand, put a plan together to improve it if necessary. The biggest plan of attack is to pay your bills on time, every time. This will go a long way in boosting your score, though you should know that it might be six to nine months before you see significant results. That is why there is no better time to start than right now; remember that patience is an ally when it comes to building your score.
If you’re in a good place with handling your credit card payments, then you could consider an increase to your limit. This isn’t because you should start purchasing more items, but because you will have a better credit utilization rate. Remember, your score accounts for how much of your available debt you have used, so if you are allowed a bigger line of credit but continue to keep your borrowed balance low, this is a good sign to lenders.
A common mistake many consumers make is canceling old or unused credit cards, thinking this will “wipe the slate clean.” The reality is that when it comes to your payment history, “history” is the important word. Having old cards with no debt works in your favor, and canceling those cards will shorten the history which is being accounted for and, likely, benefitting you. You do not have to use the old cards, but keep them open and take advantage of the history they provide.
If you really need a boost, speak with a reputable credit repair company. Getting help is a wise move when trying to improve your financial standing. While credit repair companies can provide good advice and checkpoints to keep you accountable, they can help in additional ways that you might find very beneficial. Specifically, they can help you identify mistakes on your credit report.
Mistakes on your credit report can happen, and can hinder your score. But the credit bureaus are required to consider (and repair) these mistakes if a claim is brought forward. Having a credit repair company on your side will help make this process seamless, and allow you to focus on other aspects of your financial plan.
Start now
Growing your credit score takes time and good financial behaviors, but if you have a plan in place you can make the transition with minimal effort. With patience and confidence in yourself, you will be improving your score in no time. Reach out today to learn more about establishing good financial habits and to see what else can be done toward building your score.
We’re here to help. Schedule an appointment to meet with a banker at a location near you.
Sources:
“Credit Score,” Investopedia, April 2020
https://www.investopedia.com/terms/c/credit_score.asp
“How to improve your credit score,” Bankrate, December 2020
https://www.bankrate.com/personal-finance/credit/how-to-improve-your-credit-score/
“How to improve your credit score,” Experian, December 2018
https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/
