Credit Scores Explained

Your credit score is a major factor in your overall financial health. But what exactly is it used for? How is your score determined? How do you find out your score? Can your score get better? We’re here to help you answer these questions and more. Let’s go over everything you need to know about credit scores.

What is a Credit Score?

Your credit score is used in lending decisions to determine if you qualify for loans and credit cards – things we will all need at some point in our financial journey – and what interest rate you qualify for. Your credit score may also be evaluated when applying for jobs or renting an apartment or home. There are several different scoring models and some are used more widely than others, such as the FICO® Score. Essentially, your credit score is like a “grade” that reflects how responsible you are as a borrower. The better your credit history, the better your score.

How are Credit Scores Calculated?

Your credit score is determined from information provided by lenders. Credit reporting agencies (Experian, Equifax, and TransUnion) collect information about your loan that is then evaluated to determine the likelihood that you will pay back future credit you apply for, based on your past behavior. Here are the factors go into your credit score calculation:

• Payment History – This looks at if you pay your bills on time. A few late payments over time won’t be an automatic score-dropper, but chronic late or missed payments will negatively impact your score. So try your best to stay up-to-date on all your payments and pay at least the minimum amount due by the payment deadline.
• Credit Utilization – This measures the amount of credit you are using compared to the total amount of credit available to you, or your credit limit. The lower your credit utilization ratio, the better your chances for a higher credit score. Avoid getting too close to maxing out your limits. Try to keep your total credit utilization below 30%.
• Credit History – The length of time you’ve been using credit also affects your score. If you are new to borrowing, you will have a very limited credit history, but a more established credit history will give lenders more information to base their decisions on. When it comes to negative items on your credit report, such as multiple late or missed payments, they may count for more if they occurred recently as opposed to further in the past. The ages of your different accounts and when you used them last is also evaluated. Keeping your oldest accounts open, even if you don’t use them, can help your score. And think twice before opening any new accounts, as that will lower your average credit age. Time and patience will get you where you want to be in building your credit history.
• Credit Mix – This examines what types of credit accounts and debt you have. A mix of different types of accounts, such as credit cards, mortgages, or other loans, may help improve your score. Lenders like too evidence that you are able to successfully manage multiple accounts at once. However, you certainly don’t want to open any extra accounts just for the sake of pumping up your score. Use your credit strategically, and add new accounts when it makes sense for you.
• New Credit – This considers if you have any recently opened credit accounts, especially if you opened several accounts in a short period of time. Avoid opening new accounts too often, especially too many at once, as that appears risky to lenders.

What is a Good Credit Score?

There are several different scoring models, typically with scores ranging between 300 and 850. Scores are ranked by quality, such as poor, fair, good, and excellent. Most scores that fall in the “good” range start around 670 to 700, with “excellent” scores landing at 800+. Once your score is approaching the mid-700s and above, you are much more likely to qualify for loans and credit cards and qualify for a good interest rate. Higher credit scores indicate responsible past credit behavior, which makes lenders more confident when evaluating requests for credit.

How to View Your Credit Score

Most financial institutions and credit card companies provide your credit score for free in their online platforms. With Robins Financial, you are able to check your FICO® Score for free within Digital Banking. You can also request one free credit report each year at AnnualCreditReport.com to review your full credit report.

How to Improve Your Credit Score

Your credit score will fluctuate any time there are changes in your credit activity. Here are some of the most impactful steps you can take to help increase your score:

• Keep a low balance – Keeping your credit balance low means you have a low credit utilization ratio, which is good for your credit score. When it’s time to make payments, try to pay off your balance in full when possible. Paying in full will allow you to avoid paying extra money in interest charges. You should always be paying at least your minimum payment amount. If you are not able to pay your full balance, make sure you always pay at least the minimum payment amount, and try to pay as much over the minimum as you can so you keep reducing your balance.
• Pay on time – Always make sure you submit your payments on time each month so you avoid penalty charges for late payments. Consistent on time payments will improve your credit score over time. Set up automatic payments when available so you can ensure you never miss a payment due date. Set up Bill Pay with your Robins Financial account in Digital Banking.

If you are new to credit and are seeking to build your credit, here are some more steps you can take to start growing your score:

• Start small – Open a credit card with a low limit, somewhere around $500-$1,000. This will make sure you don’t get in too far over head with a high credit limit and be tempted to run your balance up. Use this credit card sparingly, such as for gas or groceries, or a few other relatively small purchases you can pay off easily. Keep your balance low and pay it off in full each month. Once you have established credit usage and payment history, you are more likely to qualify for other types of loans. After a while, you can ask for a credit limit increase or apply for another credit card or loan.
• Save for a down payment – If you’re working on building credit to help you qualify for an auto loan, saving your money to put towards a down payment can go a long way in boosting your approval odds. It’s hard to get approved for loan without credit, but lenders are more likely to approve a loan – even for someone with no credit history – if they come ready with a sizeable down payment. Once you are approved for the loan, practice responsible payment habits.

How We Can Help

Robins Financial offers the financial tools that will help our members succeed. Our credit cards and loans not only help you get what you need, they also contribute to your credit score. Responsible use of these financial tools over time will help you improve and maintain your credit score. Think of credit like trust with your financial institution, like Robins Financial. As you build your credit and maintain responsible credit use, you build trust with lenders, making it more likely that they will lend to you in the future.

At Robins Financial Credit Union, our mission is to enhance the financial well-being of our members and community. We honor this commitment by providing educational content to help you make the most of your finances. Read our other blog articles to help you gain the financial knowledge you need to succeed.