Get to Know Your Credit
March is credit education month - do you know where your credit score comes from? We’ve collected information and resources to help you get to know your credit.
For many of us, we may not think about our credit history or score unless we’re planning a big financial change - applying for a new car loan or purchasing a new house, for example. Having a good credit score can save you money by helping you qualify for a better rate on these items. In addition to lenders, your credit information may also be reviewed for non-borrowing activities. For example, potential landlords or employers may review your credit information before accepting your apartment or job application.
Although your credit score may drop quickly from a few mistakes, raising your score can take a much longer time, so understanding your score now can be essential in reaching your financial wellness goals.
Your personal credit score comes from information stored on your credit report, which contains credit accounts and inquiries, payment history, and your identification or employment details. Other public information, such as bankruptcies and foreclosures will also be shown, if applicable. All of this information remains on your reports for various amounts of time - while new credit inquires may only show on your report for two years, tax liens will remain for seven.
Experian offers additional resources to help you understand your own credit report, who can view your report, building credit, and more
on their site.
Where does your credit score come from?
Your credit score, sometimes referred to as your “FICO” in reference to the company who introduced this scoring method (the Fair Issac Corporation), ranges from 300-850 and acts as a snapshot of your credit history. If you are a responsible borrower and meet payments on time, your actions will be reflected by a higher score.There are three credit bureaus in the Untied States that process your credit information: Experian, TransUnion, and Equifax. When applying for a loan or financing a new loan, it’s possible that a lender receives slightly different scores for you. There is no need to worry over this! The information processed or calculated by each bureau may differ slightly (the below scoring method comes from the traditional FICO method). However, if you see a large discrepancy in your score from two difference bureaus, this may indicate that something was incorrectly reported on your report, so reviewing a copy of your report to verify accurate information may be wise. Each bureau is required to provide a free copy of your report every twelve months. You can request yours at AnnualCreditReport.com
Your score is broken down into five categories:
- Payment History (35%) - Do you make your loan and bill payments on time? The largest factor of your credit score considered if you make your payments on time. If you consistently make payments on time, you can see your score go up. Keep missing payment deadlines, and you can see your score go down.
- Credit Utilization (30%) - How much of your available credit do you use? Constantly maxing out credit cards or borrowing up to your credit limit may negatively affect your score, as creditors often view this as risky borrowing behavior. Using credit modestly and only when needed can benefit you here.
- Length of Credit History (15%) - How long have you had credit? When you get your first credit card or loan, you will have little to no credit history to reflect on. As time goes on and you successfully borrow and pay money back, you will earn credit history.
- New Credit (10%) - How often do you apply for new credit? Applying for loans and credit cards too often may harm your score. It’s important to apply for credit only when you need it, to prevent yourself from borrowing too often.
- Credit Mix (10%) - What different types of credit do you have? Having multiple types of credit (credit cards, loans, or mortgages) can show lenders that you can successfully manage and pay back difference types of credit. Although it may help your score, having each type is not necessary, especially if you don’t need them.
Although FICO scores are most common, other credit scoring models, such as the VantageScore, exist. This score was actually created by the three major credit bureaus and works similarly to traditional credit scores. Low scores indicate high risk in a borrower, high scores indicate less risk.
How can you reach your credit goals?
- Pay on time. Because payment history is the largest factor in determining your score, making your payments on time is the simplest thing you can do to improve or maintain your score. Setting reminders on your phone or marking your calendar may provide helpful reminders.
- Establish a savings account. If you have money available to you in the event of an emergency of unexpected bill, you won’t have to rely on credit to make these unexpected payments
- Secured credit cards. Secured credit cards work similarly to traditional credit cards, however, upon opening the account, a deposit is required. This deposit reduces risk for the lender, by ensuring access to funds in the event you are able to pay your credit card bill. If you are looking for a secured credit card to begin or rebuild your credit, a Chaffey Secured Visa credit card may provide the credit-building benefits and Visa Rewards you're looking for.
- Avoid borrowing too much. Regularly maxing out on your credit cards or applying for new loans may indicate risk to a lender or bring your score down. A good rile of them for using credit cards is to use 30% or less of your credit limit when possible
- Try to keep old credit lines open. Closing old credit cards can reduce the length of your credit history. It can also lower your capacity for credit, impacting your credit utilization. Keeping your old credit lines open for occaisional use can prevent this.
- Track your credit. Understanding your personal score is the first step to improving it. Through a Chaffey Plus Checking account1, you can receive access to additional credit resources, such as a credit report and score2*, credit score tracker2,3, credit file monitoring*, and Financial Wellness 360o 4 to help you proactively maximize your financial wellbeing. Talk with a representative today to see how you can take advantage of these benefits.