A Good Credit Scores Improves Your Financial Health

credit score

Tips for Improving Your Credit Score

Having a strong credit score is one of the most important measures of financial health. It can tell lenders at a glance how responsible your credit use is. The better your score, the easier it is to be approved for new loans or new lines of credit. It can also open doors to the lowest available interest rates when borrowing money. Boosting your score can improve your financial health. There are some quick and simple things that you can do to improve your score.

What is a Credit Score?

A credit score is a numerical summary of your credit history. Credit scores range from 300 to 850. A score of 300 is a poor score, and a score of 850 is an excellent score. Scores closer to 850 illustrate consistently good credit histories. This means on-time payments, low credit use, and long credit history. Lower scores indicate that a borrower may be a risky investment because of late payments or overextended use of credit.

There is not an exact cutoff for a good or bad score, however, there are guidelines for each. Most lenders view scores above 720 as ideal and scores below 630 as a problem. It is important for consumers to be aware of their score so that they can work to improve their financial behavior in an effort to improve their score when necessary.

Why Does a Good Credit Score Matter?

Someone with a good credit score can get better rates on mortgages, auto loans, and anything that involves financing. So a strong credit score can save most people hundreds of thousands of dollars over the course of their lifetime. An individual with a good credit rating is considered a low risk borrower. They may receive better rates, fees, and perks from banks when applying for loans and financing. Poor credit scores can affect an individual’s ability to rent housing, rent a car, and even get life insurance.

How are Credit Scores Calculated?

Whether you are building your credit from scratch or rebuilding after your scores have gone down, it is important to understand how your scores are calculated. Credit scores are determined by computer algorithms called scoring models that analyze one of your credit reports from Experian, TransUnion, or Equifax. These are the three major credit bureaus. Although scoring models use different factors, or the same factors weighted differently, to determine a score, there are many general similarities.

Most lenders use credit scores calculated by FICO and VantageScore® scoring models. FICO uses 5 components to determine your credit score.

  1. Payment history is 35% of the score.  This looks at whether you pay on time and whether you pay the minimum balance.
  2. 30% of the score is the amount owed.  Someone that uses less than 30% of the credit allowed, is considered a safe borrower and gets a positive rating.
  3. The length of credit history makes up 15% of the score.  The longer an individual has an account, the better.
  4. 10% of the score is the mix of credit for an individual.   FICO prefers a mix of credit cards, mortgages, and auto loans.
  5. The last 10% of the score is from new credit.

What can you do to improve your credit score?

Pay your bills on time. This is the best way to influence your FICO and VantageScore. This is also a good indicator that you will handle future debts responsibly. The longer the history of paying on time, the better. Make sure you don’t miss a loan or credit card payment by more than 29 days. Payments that are at least 30 days late can be reported to the credit bureaus. A good way to ensure payments are on time is to set up automatic payments for the minimum amount due.  If you are having trouble affording a bill, be sure to reach out to the credit card company and discuss your hardship options. Late payments can stay on your credit report for up to 7.5 years.

Lower your credit utilization. This is the portion of your available credit you use, expressed as a percentage. It is the total of balances on all your credit cards divided by the total of all your credit limits. (It’s also figured on a per-card basis.) This number is a big factor in your credit score — the less available credit you use, the better it is for your score. A recommended guideline is to use less than 30% of your limit on any card. So paying credit cards strategically is important. One way to do that is to pay down the balance before the billing cycle ends or to pay several times throughout the month to always keep your balance low.

Leave your old accounts open. Once paying off student debt or an auto loan or a credit card, it is tempting to get rid of any trace of it and wipe it from your credit report. However, as long as your payments were timely and complete, these records can actually continue to help your credit score. Closing a credit card account can actually lower your credit score because you will have a lower maximum credit limit. So if you are still carrying balances on other loans or credit cards, your credit utilization ratio will go up. This would knock a few points off of your credit score. It makes more sense to keep the card with a zero balance.

Become an authorized user on a credit card account with a high credit limit and a good history of on-time payments. When added as an authorized user, it gets added to your credit reports, so its credit limit can help your utilization. This is also sometimes called credit piggybacking and it allows you to benefit from the primary user’s (often a parent or relative) positive payment history. The account holder does not have to let the authorized user use the card or even provide the account number. For the best effect, make sure that the account reports to all three major credit bureaus. This is also especially helpful if someone has a thin credit file or very little established credit.

Only apply for the credit you need. Every time someone applies for a new line of credit, a hard inquiry is pulled on their credit report. This inquiry lowers their credit score temporarily. So never apply just to see if you can be approved or just because you receive a pre-qualified offer of credit. The effects of a hard credit inquiry on your score can last for up to 12 months. So, be sure to only apply for the credit or loan that you need. It is also a good idea to refrain from applying for credit cards before taking out a large loan like a mortgage.

Establishing good financial habits, paying balances on time, keeping low utilization rates, and applying only for credit that you need should work to lower your credit score over time.

How do you check your credit report?

You can get a free copy of your credit report at annualcreditreport.com from each of the three reporting agencies, or you can call 1-877-322-8228. Be sure to check your credit report for errors that could be dragging down your score. Any mistakes can be removed by disputing them directly with the credit bureau. They are obligated to investigate any dispute and resolve it in a reasonable amount of time.

Jarrettsville Federal Savings and Loan put down roots in the community in 1869 as a strong, stable financial institution. Over the years, we have developed relationships that span generations. Our 153-year tradition of community banking helped us to grow. Today, we continue to thrive, with checking, savings and loan products that meet our customer’s needs, technology that brings us into the future, and community service that gives back to our customers. If you are in need of a loan or financial services, contact us at 410-692-5151 or visit our website.