Just 54% of Americans have checked their credit score in the past year, and 33% have looked at their credit report. (Source) Yet, a good credit score is a critical component of your financial well-being. Even without immediate plans to apply for a loan, rent a new apartment, or anything else credit may impact, it’s helpful to stay in-the-know and ahead of your score. October 22nd is National Get Smart About Credit Day, so let’s dive in and talk about the nuts and bolts of building your credit.
What is a credit score?
A credit score is a number, usually ranging from 301 to 850, that informs various entities how well you manage credit and how likely you are to repay loans or credit cards. There are various reporting agencies. Still, most people are familiar with the three large national credit bureaus: Equifax, Experian, and TransUnion.
What elements make up a credit score?
- 35% of the score = Payment History: How have you repaid your debt in the past? Generally, anything negative will drive down your score, and anything positive will drive up your score. Your past lending behavior determines your future lending behavior.
- 30% of the Score = Credit Utilization: This part of the score focuses on how much available credit you have. Do you max out your credit cards? Are you always close to your credit limits? The best credit scores typically have anywhere from seven to 20 percent of their overall debt used.
- 15% of the Score = Length of History: It is impossible for a person who is new to credit to have a perfect score. Unfortunately, it doesn’t work that way. You have to prove over time that you can manage credit responsibly.
- 10% of the Score = New Credit: How many credit inquiries or new lines of credit (including credit cards) do you have? More is not better in this instance. Be sure to limit any new credit you request to only that which you genuinely need. Having a credit card “just in case” will not usually help your score. You need to use the credit you have but use it wisely.
- 10% of the score = Credit Mix: What type of loans do you have? A credit card? An auto loan? A home loan? In most instances, lenders find that borrowers with the right mix of credit may be less risky.
By law, you have the right to get a free copy of your credit report every year. To obtain your free report, visit www.annualcreditreport.com.
How can you get yours?
By law, you receive a free copy of your credit report from each of the three national credit bureaus. We recommend checking in with each bureau once a year, checking a different one every four months, allowing you a seasonal check-up with your credit activity, and the ability to catch any discrepancies early on.
It is worth noting that no entity may review your credit report or score without your permission.
What are good credit scores?
Each credit scoring agency calculates scores differently; however, credit scores usually range from 301 to 850. Scores higher than 750 are considered excellent and affording you the ability to secure the credit you want with generally most favorable rates. Generally, the better your credit, the easier it is for you to get credit at favorable rates and terms.
What are the best ways to raise a credit score?
The steps toward improving your credit are amazingly simple to understand but not always easy to put into action:
- Pay all your bills on time every single month. Scheduling automatic payments through your credit union’s online bill pay option is the best way to make payments on time. Be sure always to make at least the minimum payment.
- Mind your max. Maxing out credit cards is an activity that creditors and lenders look to find. The way you use the credit available to you is a critical factor in calculating your credit score.
- Look into a debt management plan. You may need help along the way! Consider reaching out to your credit union to find the plan best suited for you. They can help you manage your automatic payments and find your high-earning savings accounts to help you start.
The most important thing to remember about credit is that you are ultimately in the driver’s seat. But you don’t have to take this road alone. Taking control of your finances and practicing sound money management are the best ways to raise a credit score.