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Unlock a Better Financial Future: Five tips for boosting your credit score.

in Managing Money & Credit
credit score

Your credit score plays a major role in unlocking many financial benefits, products, and services in today’s society. Securing a mortgage for your dream home, enjoying the many conveniences of credit cards, and even accessing the necessary funding for higher education, are all dependent on having a strong credit score.

Your credit score also determines your level of access to certain credit services and the terms, conditions, and rates you receive from financial institutions. Understanding the factors that make up your credit history, the importance of a good credit score, and ways to improve your overall credit can all help you achieve your financial goals.

What Determines My Credit Score?

While the calculation for determining your credit score can be complex, the weighted factors used are pretty straightforward.

There are two main consumer credit scoring models, VantageScore and the Fair Issac Corporation (FICO), with the latter being the most popular.

Credit scores typically range from 300 and 850 and are comprised of these weighted factors:

  • Payment history: This makes up 35% of your credit score and is the most influential factor. Your payment history factors for both on-time and late payments and also takes into consideration whether or not you’ve ever filed for bankruptcy.

Note: If you do end up with a negative factor on your credit, the Fair Credit Reporting Act ensures that any adverse credit actions get removed from your credit report after seven years (with bankruptcies typically falling off your credit report record after ten years).

  • Amounts owed: The amount of liability you carry (how much you owe on all of your debt) also has a significant impact on your credit score, making up about 30% of it. Your credit utilization ratio — how much credit you’re using versus how much you have offered to you — is a major factor in this calculation. You can determine your credit utilization ratio by dividing your total debt by your total available credit. A lower credit utilization (about 30% or less) is favorable because it shows that you’re not using most (or all) of the credit that you could be using.
  • Credit history: The next most important factor in determining your score is your credit history, making up about 15% of your credit score. The longer you’ve been responsibly utilizing credit, the better your score will be.
  • Credit mix: This factor makes up about 10% of your credit score and has to do with the types of credit you use, such as revolving credit (home equity lines of credit, credit cards, and personal loans) and installment credit (mortgages, student loans, and auto loans). Having a mix of both types of credit can help you build a stronger score.
  • New credit: A new credit application can somewhat lower your credit. You should be mindful of not applying for multiple loans and lines of credit at the same time, as it could make it appear as though you are being unwise in your credit usage.

When considering ways to increase your credit score, keep these weighted factors in mind.

Credit Scores versus Credit Reports

Your credit score provides a quick snapshot of your interaction with credit, while your credit report provides detailed information and a summary of your credit history. Both tools are typically used when a lender is determining whether or not to lend you money.

There are three main credit bureaus in the United States—Equifax, TransUnion, and Experian. These three bureaus continually collect information about your credit and build reports based on that information. When a lender, landlord, or employer wants your credit history information, they are able to obtain it from these three reporting agencies.

There can be slight discrepancies between the three reports created by the different bureaus because they don’t always receive the same information. You will also have three different credit scores that may vary slightly because they are based on each individual bureau’s reports.

Each bureau offers consumers one free credit report every 12 months. They are required to collect the most accurate information possible; however, it’s important to check your report every year to ensure that there are no mistakes.

Credit Score Ranges

FICO scores fall on a scale and are generally categorized into as follows:

  • Poor: 300-579 — Approximately 16% of Americans fall in this range.
  • Fair: 580-669 — Approximately 17% of Americans fall in this range.
  • Good: 670-739 — Approximately 21% of Americans fall in this range.
  • Very Good: 740-799 — Approximately 25% of Americans fall in this range.
  • Exceptional: 800-850 — Approximately 21% of Americans fall in this range.

You can check your credit score in a variety of ways, including:

  • Credit Monitoring Services: Many consumers choose to sign up for credit monitoring services in order to catch fraudulent activity and keep track of credit score changes.
  • Credit Bureaus. The three main credit bureaus that we mentioned above offer both credit scores and reports, but the credit score is typically not included on your report (you typically have to pay extra to access it).
  • Credit Card Statements. Financial institutions and credit card companies sometimes provide your credit score for free. Check with your card issuer or banking partner to see if they offer this service.
  • Credit counseling organizations. These companies help consumers get out of debt and improve their credit. They can also help you access your credit score as part of their counseling services.

Importance of a Good Credit Score

A strong credit score increases your financial opportunities, provides you with more flexibility, and often gives you access to better rates and terms. Consider these five specific reasons why a good credit score is important:

  1. Access to rentals. Many landlords use credit scores to determine whether or not they choose to rent their property to tenants. A tenant’s credit score shows the landlord if the tenant has a positive history of on-time rental payments and handles their financial obligations responsibly. If you have a strong credit score, you likely will have access to more rental options.
  2. Better mortgage rates. The mortgage rate you’re offered from lenders heavily depends on your creditworthiness. And considering your mortgage payment is often one of your biggest monthly expenses, it’s essential to have a strong credit score. Having a credit score of 700 or above generally gets you the lowest mortgage rates.
  3. Favorable loan terms. Similar to better mortgage rates, a strong credit score can give you access to fewer loan fees and more favorable terms. This can be useful when you apply for personal, auto, or other loans.
  4. Lower auto insurance premiums. Though your credit score is just one of many factors insurance companies use to determine your premium prices, a strong credit score can help lower your costs.
  5. Increased financial security. A strong credit score shows that you are reliable, handle debt responsibly, make on-time payments, and other positive attributes, all of which lend to a higher sense of financial security.

Maintaining a strong credit score can bring you these five benefits and more.

5 Simple Ways to Improve Your Credit Score

Whether you’re young and looking to build a strong credit foundation, are struggling to rebuild poor credit, or just want to improve your credit score, these tips can help you improve your score! Consider implementing these simple steps today.

  1. Implement responsible credit card management habits.
  2. Decrease your liabilities.
  3. Pay your bills on time, every time.
  4. Keep an eye on your credit report.
  5. Maintain longevity.

1. Implement responsible credit card management habits.

It’s never too late to start implementing or improving your credit card management habits, and responsibly using your credit cards is a great place to start! These habits include:

  • Using credit cards for what you can afford only. It’s crucial to have the right mindset about credit cards—just because you have a $10,000 credit limit, does not mean you have $10,000 to spend. Credit cards should not be used to overextend yourself and push your budget beyond what you can afford.
  • Never maxing out your credit card. This can be a slippery slope because when you max out a credit card, you may not always be able to pay back the entire amount, leading to interest charges and possibly late penalty fees. Keeping low balances is a responsible way to best use your credit card.
  • Not opening too many credit accounts. As we mentioned before, new credit applications can temporarily decrease your credit score. But too many cards can also create a lot of temptation and confusion. You may end up putting purchases on a card and forgetting to pay the bill, lose track of the cards, or simply get tempted beyond your self-control. Choosing the right type and amount of credit cards is crucial to responsible credit card usage.

2. Decrease your liabilities.

Reducing your debt and liabilities is a key way to improve your credit score because it lowers your credit utilization ratio (the amount of credit you have available to you versus the amount you utilize). A lower credit utilization ratio reflects positively on your credit reports.

Making debt payments on time and in full also positively affects your credit score and shows that you are handling your debts responsibly and have effective credit management skills. Decreasing your liabilities also lowers your debt-to-income ratio (your monthly liability payments divided by your monthly gross income).

3. Pay your bills on time, every time.

Your payment history makes up over a third of your credit score, which means paying your bills on time, every time, is critical in improving your credit score. Setting reminders to pay bills or setting up automatic payments is a great way to ensure success.

On-time payments also build trust with financial institutions, potentially leading them to offer you lower fees and better terms in the future. It also decreases the risk of late payment fees. This simple strategy can greatly improve your credit score when practiced diligently.

4. Keep an eye on your credit report.

Sometimes simply catching a mistake on your credit report can help fix any discrepancies and increase your credit score. Make it an annual habit to request your free credit reports from the three major credit bureaus and check them for accuracy.

If you catch a mistake, reach out to the credit bureau directly to get the report corrected. You can visit their websites to find out how to contact them and what information you’ll need to have on hand.

5. Maintain longevity and variety.

The longevity and variety of your credit history play a major part in your credit score. It’s important to keep track of which account or credit card is your oldest and keep it open. A lengthy and robust credit history can also help shield you from any small credit mistakes you’ve made. A healthy credit mix can also positively affect your credit score and prove that you are a reliable borrower.

Build Your Credit (and More) with Lafayette Federal

At Lafayette Federal Credit Union, we exist to serve our members and guide them on the path to financial success. We offer a wide range of services and financial products designed to help you achieve your financial goals, increase your credit score, and more by offering education, competitive rates, low fees, and a personalized service experience.

Our credit cards offer rewards and build a positive credit history with no annual fee or foreign transaction fees. Our personal loans can help you cover expenses, earn dividends, borrow against your savings, and protect your account balance (while building your credit).

Additionally, we offer the tools and resources to ensure you’re on the path to financial success.

Not a Lafayette Federal member yet? You can become a member by completing an online membership application.

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