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Collins Community Credit Union

Understanding Your Credit Score

Why should you care about your credit score? A good credit score is critical if you need to borrow money for an auto loan, mortgage, or any other reason. The higher the credit score, the easier the loan approval process. Not only does your score impact if you get the loan, but it also can affect the terms of the loan, such as the interest rate or down payment.

Published on Feb 03, 2021

To have a credit score, you must first establish credit. Typically this is accomplished by obtaining and using a credit card. To have a good credit score, you must use your credit responsibly.

Getting your credit score
If you don’t know your current score, you can request a free copy of your credit report from the three reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. It is a good idea to request your information from all three to know your scores and catch any discrepancies.

There are different credit score systems, but the main one is FICO, which many lenders use. FICO scores range from 200-850; however, anything over 670 is considered acceptable. Although there is no hard and fast number used by lenders to decide on giving a loan and what the terms are, there are multiple factors they take into account, and ultimately it will depend on the level of risk the lender is willing to accept.

Things that impact your FICO score
Many factors influence the calculation of your credit score, including:

• Payment history is the most significant factor in determining your credit score. With FICO, it accounts for 35% of the calculation. Having a history of not making payments or paying late will be reflected in your score. Missed payments will stay on your report for seven years.
• The second most influential factor is the amount of debt you owe. Current debt accounts for 30% of your FICO score.
• The number of years you have been using credit is also part of the score determination. FICO considers the following as part of your score determination: newest & oldest accounts, the average age of all accounts, and the length of time since they were active.
• Opening many credit accounts in a short period can be a red flag and will likely negatively impact your FICO score. For this reason, avoid opening a lot of new credit accounts before requesting your report.
• How many inquiries lenders request for your credit report is also considered. However, this doesn’t include the request you make for your credit report.

Your credit score does not consider things like your age or salary.

How to improve your credit score
Improving your credit score isn’t going to happen overnight. It takes time and effort, but you can increase it over time.

• First and foremost, don’t miss or be late on payments. Start paying your bills on-time consistently to impact your score positively.
• Focus on paying down existing debt.
• Don’t close any credit cards that you already have. Closing credit cards can lower your overall credit limit, negatively impacting your score. Although, don’t open several new cards too quickly either, only open new accounts as needed.
• Make sure there are no errors in your credit history. Should you identify mistakes, work with the credit reporting agency to dispute and correct them.

Your credit score will change regularly. Each time it is pulled, it offers a snapshot of your credit history then. While you likely won’t see large jumps in your score, you can start to move it in the right direction with dedication.

 

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