Credit Scores – why are they important?
A credit score is a three-digit score between 300 and 850 that summarizes a consumers creditworthiness based on their credit history. The scores are typically used by potential lenders to determine a consumer’s creditworthiness. The score is calculated based on several factors including a consumer’s number of open accounts, total levels of debt, repayment history. Depending on the company analyzing one’s credit, each factor may carry a different weight when determining the score.
Typically, credit scores from 580 to 669 are considered fair, 670 to 739 are considered good, 740 to 799 are considered very good, and 800 and up are considered excellent, though the ranges can vary depending on the credit scoring model being used.
There are three credit reporting bureaus in the United States, Equifax, Experian, and TransUnion and you can access your credit report by visiting AnnualCreditReport.com.
There is also a different type of credit score called a FICO® score. FICO refers to Fair, Isaac and Company. FICO uses a slightly different scoring model, but it is still based on a scale from 300 to 850.
Maintaining a high credit score is important because it can impact your ability to get a loan in the future. You may need a loan for things like a new car, boat, motorcycle, RV, house, home equity loan or line of credit or even a personal loan (like for college tuition). Credit scores can also be influential for landlords when deciding who they will rent their apartments out to. The higher the credit score you have, the more you are considered trustworthy when it comes to paying the money you owe. Higher credit scores are more appealing to lenders and they’re more likely to trust you with a higher loan amount. If you have a higher credit score, you may also be eligible for lower rates, which can save you a lot of money in the long run.
There are several ways to build your credit score
- Pay your bills on time. This is one of the most important parts of maintain your credit score. Lenders want to know that you are reliable, and therefore a late payment can hurt your score.
- Only use about 30% of your credit card’s limit. If you use too much of your available credit, it can impact your score.
- Use your credit accounts and cards regularly. Inactivity with a credit account also looks bad to lenders. A key part of building credit is regularly using and paying off your credit.
- Pay your balance off in full every month. If you can afford to, it is best to pay your bill in its entirety every month. Carrying a balance can hurt your score, especially if it’s a large balance.
- Avoid closing accounts. Closing accounts can also hurt your score, because any good credit you have built up with a certain account will be removed with a closed account.
If you’re interested in trying to improve your credit score, here are a few things you can do:
- Put your accounts on auto pay so you never miss a payment deadline. With many bills, this can be done through Bill Pay in Online or Mobile Banking.
- Set due dates for non-automated bills so you never forget to send in a payment.
- Limit your requests for new credit streams. It may be tempting to chase good credit card offers, but if you frequently open new accounts, it can adversely affect your credit score.
- Check your credit report for errors. Make sure to carefully review your credit reports to ensure all of the information is accurate. If you see any incorrect information, you can dispute it by contacting the credit reporting agency who generated the report and your credit lender.
- Use a credit monitoring service. Credit monitoring can help you track how your credit score changes over time. They can tell you things like when an account is paid off, monitor for changes in your report, or alert you when a new account has been opened. This is especially helpful when trying to prevent identity theft because you will be notified right away if someone tries to open an account in your name.
- If you are unable to pay your bills, contact your lenders to discuss your options. You may be able to negotiate a lower rate or defer your payment. Speaking up early about the situation is always better than missing a payment.
Building credit or fixing a bad credit score can take time. It is important to be patient and try a few different tactics to improve your score over time. With a few changes, it should be easy to get your score to where you want it to be.