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Guide to Managing & Understanding Credit Score

Guide to Managing and Understanding Credit Score

Is improving your credit on your list of new year’s resolutions? With the average credit score in the U.S. falling around 711, it’s clear that there’s room for improvement. In this comprehensive guide, we’ll explain everything you need to know about how credit scores are calculated, what makes a “good” or “bad score,” and what you can do to manage and improve yours.

Why Having Good Credit is Important

Do you plan on buying a house someday?

Need a new car but can’t afford to pay all cash?

Big purchases like these are just some of the more obvious benefits of maintaining a good credit score. But did you know about the following benefits of good credit?

  • Lower interest rates: It’s important to note that your credit score doesn’t just determine whether or not your loan application is approved. It also determines the interest rate you’re offered. The lower your score, the more of a risk you are as a borrower, so the higher the interest rate you’ll have to pay. Thus, maintaining a good score can save you a lot of money in interest payments over the long run.
  • Better credit cards: Do you have your eye on one of the flashy rewards credit cards you’ve heard about from friends? The truth is that the best offers and terms go to applicants with the best credit scores.
  • Lower car insurance premiums: While you won’t be turned down completely for having bad credit, a lower score could mean higher premiums. Save money on insurance by keeping your score as high as possible.
  • Easier to get an apartment: Most landlords and rental management companies will run a credit check on you before approving your application. Having good credit makes it easier to get approved and eliminates the co-signer requirement.
  • No security deposits on utilities: Speaking of moving into a new place, the last thing you want to deal with is the hassle of putting down a security deposit before you can get electricity, gas, or cable hooked up. Your past payment history and current credit score determine whether this requirement will apply to you or not.
  • More employment opportunities: Some employers will run a credit check on you as part of the application process, though they have to ask permission first. A lower score could eliminate you from certain types of jobs, such as retail.

Having a good credit score makes a lot of things easier, especially get approved for a mortgage. Borrowers with a score of 740 or higher will get the lowest interest rates.

“Good” vs. “Bad” Credit Scores

Now that you understand the importance of having good credit, you may be wondering what the difference is between good and bad credit. Here’s what you need to know:

The two most commonly used credit scoring systems are FICO and VantageScore.

In both models, your 3-digit credit score can range from 300 to 850.

  • Excellent: 720+
  • Good: 690-719
  • Fair: 630-689
  • Poor: 629 and lower

Not sure what your current score is? You can use free apps like Credit Karma and Credit Sesame to view a close estimate of your score. If you want to know the exact number, you can pay for access to your store. Also, check your credit card benefits to see if you have free access to your score that way.

What factors affect your credit score?

So, if your score is good to excellent, how can you keep it that way?

If it’s fair or poor, how can you improve it?

To answer these questions, you need to understand the factors used to calculate your score:

  • On-time payments: Your credit score benefits from paying your bills on time, every time. Late payments of 20 days or more past due can stay on your credit report for years and lower your score.
  • Credit Utilization: Your total account balances relative to credit limits. Credit utilization is one of the most significant contributors to your credit score, so be mindful and try to never use more than 30% of your available credit limit. Feeling ambitious? Lower is even better if you can aim for less than 10% utilization at any given moment. If you’re trying to improve your credit score quickly, paying down balances can make a big impact.
  • Credit History: Includes the number and types of accounts you’ve opened recently, active and closed accounts, account balances and payment history over time, and any late payments. Applying for more than one credit card or loan in a short span of time can be a sign of financial distress, so it may lower your score. You may also want to wait before closing a credit account you no longer use, as it could increase your credit utilization rate by lowering your overall amount of available credit.
  • Credit Age: The higher the average age of your accounts, the better your score. This is another reason to just cut up a credit card you no longer use instead of closing the account entirely.
  • Credit Mix: Your credit score will benefit from having a mix of different types of credit in your name, such as a student or auto loan, a mortgage, credit cards, etc.

One of the best ways to improve your credit score is to reduce your credit utilization to under 30% of your credit limit and make monthly payments on time.

How To Get Your Credit Report

Annualcreditreports.com is the only source for free credit reports authorized by Federal Law. As of this writing, you can receive free weekly online reports through April 2021. Outside of this special exception due to COVID-19, you are entitled to one free report per year from each of the three major credit reporting bureaus: Equifax, Experian, and TransUnion. Instead of getting all three at once, consider spacing them out every four months so you can keep tabs on your credit history throughout the year.

Whenever you review your credit report, look for any errors that need to be corrected, as well as any suspicious activity or signs of fraud. The data included on your credit report includes your personal information and financial history such as address, credit accounts, payment history, account balances, credit inquiries, collection accounts, delinquencies, and public records like bankruptcies or civil judgments.

If you need to check your credit report but have already used up your free reports, you can purchase copies directly from the major credit reporting bureaus as well.

How To Improve Your Credit Score

Finally, we’ll leave you with these tips for improving your credit score and maintaining a good score.

  • From utilities to credit accounts, pay all your bills on time.
  • Ask your credit card issuer when they report balances. If you can pay off some or all of your balance before it’s reported, your credit utilization ratio will look better.
  • In general, pay off as much debt as much as possible and keep your balances low or at zero.
  • Ask your card issuers to raise your credit limit so that your overall utilization rate looks better.
  • Even if you have cards you don’t use, you may want to charge some small expense to them each month to pay off and keep your oldest accounts from being closed for inactivity.
  • Dispute and correct any inaccuracies or errors you find when reviewing your credit report.

Everyone is entitled to one free credit report every year from 3 consumer credit bureaus – Equifax, Experian, and TransUnion.

TFB can help you reach your financial goals!

As a full-service financial institution, TFB provides quality banking and wealth management products to businesses and families. Personal service with a hometown touch is our hallmark for making your financial life easier. Do you need help getting control over your debt and improving your credit score? Contact a TFB Financial Planner today or visit your nearest TFB branch in Fauquier and Prince William counties.