The most common financial advice people get is, “Save money for an emergency fund!” “Pay down your debt!”, or “Don’t spend more than you can afford!”. That’s all good advice, but there is one more thing – credit score.
Your credit score determines a lot of things like loan and credit card accessibility and low interest rates. Your score can also help determine your cell phone plan, utilities, premiums for auto loans, home owner’s insurance, securing a job, and securing an apartment.
Here are some common FAQ’s about credit score:
How does it work?
To calculate your credit score, a scoring formula is used. The scoring formula is obtained by the three credit bureaus (TransUnion, Equifax, and Experian) suppling information that creates a score. The Consumer Financial Protection Bureau (CFPB) says a credit score predicts how likely you are to pay back a loan on time. Some of the factors that can make up your credit score are:
- Your bill-paying history
- Your current unpaid debt
- The number and type of loan accounts you have
- How long your loan accounts have been open
- How much of your available credit you are using
- New applications for credit
- Whether you have had a debt sent to collection, a foreclosure, or bankruptcy, and how long ago
What is good credit?
FICO (The Fair Isaac Corporation) uses a formula that rates your credit score. Bankrate says that the FICO formula collects information about several areas of your financial life. They have created a model that divides the credit score into five categories.
- Poor Credit: 300-579
- Fair Credit: 580-669
- Good Credit: 670-739
- Very Good Credit: 740-799
- Excellent Credit: 800-850
A good credit score is 670 and higher. At a 740 score, you will experience some benefits of having a higher credit score. To learn more about credit score categories, go to https://www.bankrate.com/finance/credit/what-is-a-fico-score.aspx.
How to build your credit?
Adapt good habits!
- Paying Bills on Time: This is crucial to growing your score. Over a third of your credit score is determined by your payment history. You need to pay your bills on time to avoid a negative mark on your credit score.
- Credit Utilization: Credit utilization is how much of your available credit you are using. To have good credit, you need to keep your credit utilization below 30%. If you go above the 30%, you will need to pay it off quickly.
- Credit History: Lenders want to know that you can manage your credit accounts responsibly over a long period of time. Bankrate says that your credit report only tracks active credit accounts. Closing your oldest account will shorten your credit history. To help build good credit, do not close old accounts.
- Pay Balances: Paying your balances in full will help grow your score. If you do carry a balance, try to pay it down quickly.
What can a good credit score get you?
- Significant Savings on Interest Rates on Big Loans
- Better Terms on Loan Products
- Better Credit Cards
- Insurance Discounts
- More Housing Options
- Security Deposit Waivers on Utilities
The bottom line is that your credit score is very important because today’s economy runs on credit. If you follow these tips about your credit score, you can achieve good credit.
*Red Crown Credit Union is not a financial planner or advisor, and this blog gives general ideas on credit scores. Individual results may vary.