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Guide to Understanding Your Credit Score
Understanding your credit score can be hard to do, especially if you don't have a basic understanding of how credit works. Your credit score is a number that represents your financial strength, telling the world – from lending institutions to potential employers -- how well you've handled money. While your credit score can fluctuate from one company to another or one time period to another, there are several factors that every single company considers when calculating it. Determining whether or not these factors work in your favor can be tricky for people who are just now learning about their credit, so we explain all of this and more below!
5 Factors that Make Up a Credit Score
Your credit score is a number assigned to you from 300-800 based on your credit history. This score helps lenders determine your creditworthiness. Your credit score can determine loan interest rates and your ability to receive loans or open new lines of credit. To help understand what makes up a credit score we’ve broken it down for you into five categories:
1. Payment history
Your payment history makes up 35% of your score
You always hear about how you should pay your bills on time and for good reason. This is the most important factor that determines your credit score. If you've ever missed a payment or been late in paying, it remains on your report for up to 7 years, which could affect your credit rating for that long.
2. Debt-to-credit ratio
Your "owed balance" makes up 30% of your score
The amount of debt you owe is factored into your debt-to-credit ratio. To help raise your score or build healthy credit, it is essential to keep the amount of debt you own low; you want a smaller amount of debt than the amount of credit allotted.
3. Credit history
15% of your credit score is based on the length of your credit history
Credit history is determined by how long you've had a line of credit and how well you managed your credit. To start building credit, open a line of credit. How you manage your credit, other bills you have, and current payments will determine what is reported to your credit history. Your credit history reports back 7-10 years, so it's important to maintain a healthy score from the start.
4. Credit lines
Maintaining a manageable amount of credit lines is important, and having a good payment history will benefit your score. The more lines you have, the higher your score will be as it shows your ability to manage multiple lines of credit and payments. However, owing large amounts in multiple areas drops your score as it creates a higher amount of debt owed.
5. Recently opened accounts and inquiries
Recently opened accounts and inquiries affect your score. The more you inquire about a line of credit or loan, the more likely your score is to drop.
To keep your score high, have just the number of lines of credit you need to create a credit history. This can be reflected in your report as needing multiple loans or lines of credit, outweighing the amount available to pay off the debt.
Be sure you have enough lines of credit to create a credit history, but not too many. Having multiple lines with large unpaid balances will cause your score to drop.
Establish Your Desired Score
A great credit score will open doors for you that may have previously been shut. A bad credit score can make or break your ability to get things done — from buying your first home to refinancing your mortgage in the future.
How to start
We know you're excited to get started building your credit score, and we're here to help!
The first and most important way to reach your credit score goal is to establish a line of credit if you have not already. The only way to build credit is to use your credit. Establishing a line of credit can be as simple as opening an account with Credit Union 1 and applying for a line of credit. Oftentimes when you do not have a credit history, you will need to start with a smaller line of credit that is more secure to make sure you have a healthy start to your credit journey.
Credit Union 1 offers different lines of credit to meet you where you are in your credit journey. View our card options to start building healthy credit habits and watch your score grow.
Maintain a healthy relationship with your credit
You’ve been working hard to build a healthy relationship with your credit score, and we want to make sure you stay on track.
As your journey with credit progresses, you will be able to establish larger lines of credit, possibly gain a loan along the way, or encounter bills such as medical or other expenses.
To maintain a healthy relationship, you will need to ensure all payments are received on time and not skipped. Debt being sold to collections can cause a drop in your credit score. Making payments on time and paying debts back (even if it’s just the minimum) will help build your score. This is also relevant to those looking to lift their score; making payments on time is the best place to start.
Ways to Build and Manage your Credit
Building and managing your credit can help you establish your desired score. Below are a few ways to build your own personal credit strategy.
Use your credit card
Practicing healthy spending habits with your line of credit is key to raising your score, and monthly payments are a great way to build credit fast. By using your line of credit for common monthly payments such as gas or small bills, paying them off on time can help establish credit and raise your score. Try not to use your card for payments you know you want to be able to pay back by the due date. This can lower your score and increase the interest you pay back over time. A healthy relationship with payments means using your credit as if it were cash in your pocket.
Make payments on time
Set up automatic payments, such as Bill Pay, to manage your bills and ensure they're paid on time.
Credit monitoring
Credit union1 offers a free credit score monitoring tool for members called SavvyMoney Credit Score. With SavvyMoney, you can access your credit score without affecting your overall score. Knowing where you stand with your credit is important, as it will help you make future decisions on loans and other forms of credit. SavvyMoney also allows you to use a credit simulator. This credit simulator will show you your potential credit score when opening new accounts, increasing payments, or taking out new loans. Savvy Money also gives you insights into what’s affecting your credit and provides personalized offers to help you manage your score. With these offers you can see tips to increase your score, offers on personalized loans to fit your score, and ways to manage and increase your score over time.
Reap the Rewards of Your Improved Score
There are endless possibilities that can help you reach your goals. Here are a couple of tips to experience the benefits of your score.
Ask for a better deal
With your new score, you may now be eligible for better interest rates on a line of credit. Reach out to your financial institution, and ask them to take a look at your new and improved circumstances. By doing this you could walk away with a better deal on your existing line of credit.
Refinance high-interest loans
Once you have reached your credit score goal and maintained a healthy score, you may qualify for lower interest rates on your current loans. By refinancing your loans with your higher score, you can save money.
Protect your score
Keep an eye on your credit score and be sure to access your credit report on a regular basis. You can access your credit report for free once a year through www.annualcreditreport.com, to view your actual score through this website it will cost money, so we suggest opting into SavvyMoney Credit Score through Credit Union 1's online banking to view your score for free and keep track on a regular basis. By doing this you can monitor your credit use, see how you are doing on maintaining your score and keep an eye out for oddities that can be caused by identity fraud.
