In Focus – SCCCU Blog

Your credit score is like a bonsai tree: It requires careful tending and thoughtful behavior over time to produce the best results. Take good care with your credit (pay your bills on time and be a responsible borrower); your credit score will help you qualify for the best credit card and loan terms.

What is a credit score?
Your credit score helps financial institutions and other businesses decide how much of a financial risk you are. It’s based on your history as a borrower, along with several other financial behavior patterns. A credit score is a three-digit number typically ranging from 300 to 850. A low score can indicate to a lender that you could be more likely to pay late or default on a loan. Conversely, the better your score, the better the rates you’ll qualify for with all types of loans.

Who decides what your score is?
Your credit score is based on credit reports or your credit file information. The three national credit bureaus (Experian, Equifax, and TransUnion) gather information from financial institutions and public records for your credit file. Then, they give the information gathered to credit scoring agencies, which calculate your credit score.

How many credit scores do I have?
You’ve probably heard of FICO scores. FICO scores are based on a scoring model developed by one company — the Fair Isaac Corporation (also now known as FICO). But they’re not the only game in town. There’s also VantageScore, which the credit reporting bureaus started to compete with FICO.

To make things even more complex, FICO and VantageScore generate multiple versions of your credit score depending on the data most relevant to its customers. For example, auto lenders may have an industry-specific score different from that of a credit card company, insurance company, or mortgage lender.

Thankfully, your credit scores are based on your behavior as a borrower. So, knowing one of your credit scores gives you a good idea of how you rate when other scoring models are used.

What information is in my credit report?
Your credit file contains a history of your credit use, including how much money you’ve borrowed and from whom, how long you’ve borrowed, whether you pay your bills on time, and if you’ve recently applied for more credit. All of this information is used to calculate your credit score.

Here is what makes up your credit score:

• Payment History (35% of your score). You will nail this part of your credit score if you consistently pay your bills before the due date. Pay late or miss a payment, and you’ll lose your score. Your score will dip if you’ve had a bankruptcy, foreclosure, or defaulted on a loan.
• Amount of Debt (30% of your score): How much you currently owe counts for nearly one-third of your score. But it’s also based on your credit utilization ratio, which is how much of your available credit you use. Someone with $1,000 worth of debt on a credit card with a $2,000 limit has a higher credit utilization ratio (50%) than someone who has $1,000 worth of debt on a card with a $10,000 limit (or 10%).
• Length of Credit History (15% of your score): This category considers how long you’ve had your credit accounts, including the age of your oldest account and the average age of all your accounts.
• New Credit (10% of your score): Lenders look at the number and type of new accounts and requests for credit you’ve made. Applying for many new credit cards over a short period signals to a lender that you are financially tight and may be more risky to lend to. However, their algorithms recognize when consumers are rate shopping for things like mortgages and student loans. If those inquiries fall within two weeks, they’ll only count as one hard pull on your credit.
• Credit Mix (10% of your score): Variety is the spice of life and credit scores. Ideally, it’s better if your credit report shows a mix of loans, including revolving accounts (like credit cards), installment loans (auto loans), and retail accounts like store cards.

What’s not used in your credit score?
The credit reporting industry knows a lot about you. But certain things are not included in your consumer credit file and, therefore, do not factor into your credit score, including:

• Personal Information. Your credit score is not based on race, color, religion, national origin, sex, or marital status. It is also not based on your salary and employment history.
• Interest Rates. Your file does not include what you pay on credit cards and other loans. However, your balances, amounts due, and past-due payments are included.
• Old Credit Account/Credit Information. Negative information eventually expires. Charged-off and collection accounts over seven years old are not included in your score. Same with bankruptcies that are more than 10 years old. If you see those still listed on your credit reports, you can appeal them.
• Certain Credit Inquiries. When you check your credit, it’s called a “soft inquiry,” and no harm is done to your credit score. It is the same with inquiries from lenders reviewing your account to send you a pre-approved offer. “Hard inquiries” are noted in your file and included when you apply for credit or permit an institution to check your creditworthiness.

What is a good credit score?
Most lenders consider a score of 670 or higher a good credit score. A score of 800 or higher is considered exceptional. According to Experian, 67% of Americans have a good or better FICO score. It’s important to know that whatever your score may be, it’s up to the individual lender to say if your particular score meets their criteria for a loan and at what rate. For example, a score of 670 might qualify you for a loan at a favorable rate with one lender, but another lender could tell you they require a loan of, say, 700 or higher.

How can I improve my score?
It takes time and patience to build a solid credit history. Here are a few rules of thumb to follow that can help you on the path to getting or maintaining a good credit score:

• Establish credit if you have little to none. Some people may be surprised that they have little to no credit. Perhaps you’ve been an authorized user on your partner’s credit card, or you’ve been the primary caretaker for your family and haven’t applied for any independent accounts. Protect yourself and build credit if this is the case. There are credit cards designed for people with little to no credit.
• Pay your bills on time every month. Since the timeliness of payments significantly impacts your credit score (35%), staying on top of your due dates is paramount to keeping your score from getting dinged.
• Don’t close your oldest accounts. A long credit history can show lenders that you can pay your loans on time and are an excellent candidate to extend credit to. If your oldest card is one you rarely use, keep it active by using it for the occasional small purchase, or ask the issuer if you can change a product to a card that’s a better fit for your spending habits. That way, you’ll keep your account’s age, and your lender won’t stop reporting your good behavior.
• Avoid opening too many new accounts at once. It can be tempting to apply for several credit cards within a short time to take advantage of lucrative sign-up offers. But too many inquiries can temporarily drag down your score. Plus, sign-up offers typically require minimum spending, which could mean spending more than usual to get that welcome bonus.
• Stay well under your spending limits. Bumping up against the credit limit on your cards can signal to lenders that you’re spending beyond your means. Keep your credit utilization ratio at 30% or less for the optimal impact on your score. If applying for a mortgage or other large loan in the next several months, keep your spending to less than 10% of your available limit.
• Review your credit report to make sure there are no inaccuracies. You can (and absolutely should) see what the credit bureaus have on your credit report. They legally have to share that information. You can get your credit reports for free each year by visiting annualcreditreport.com. To clarify, you can see your credit report for free, not your credit score. But that’s okay. When you pull your credit report, you can immediately see if any errors need to be corrected and where you can improve.