Your Credit Score And You
Many aspects of personal finance can seem bewildering to everyday consumers, and credit scores are no exception. Contrary to popular belief, a credit score is not just some number assigned to each of us by a distant and impersonal financial institution – it’s a rating we shape ourselves through our financial decisions, for better or for worse. As such, we have a high degree of control over it, and in how financial institutions perceive our personal relationship to borrowing money.
Let’s look more closely at what goes into a credit score, why it matters, and how you can use tools such as Wailuku Federal Credit Union’s credit counseling service to take control of this important aspect of your financial identity.
What is a Credit Score?
Your credit score is a three-digit number calculated using details from your credit history. Credit bureaus provide credit scores and compute them in a pretty similar fashion – but the FICO score is the most widely used. FICO scores range between 300 (lowest) and 850 points (highest). An average score is about 675, and anything between 700 and 750 is considered good. A credit score of 740-750 is generally the threshold for receiving the best rates on financial products.
A credit score is different from a credit report. While a credit score is a number, a credit report is a detailed account of your personal information and financial history that helps shape that number. You are entitled to one free credit report from each of the 3 credit bureaus per year (go to www.annualcreditreport.com), though you may have to pay a small fee to access your actual credit score, depending on the service you’re using.
How is a Credit Score Calculated?
Your credit score is derived from a wide range of factors: payment history, the amount you owe, the length and variety of your credit, and your use of new credit. Here’s a bit more about each factor, along with the weight it carries in calculating your FICO score:
- Payment history (35%): Factors in your on-time and late payments for all accounts (credit cards, mortgages, and installment loans such as auto loans). Also factors in the number of accounts in good standing, current and past delinquencies, and any judgments such as bankruptcies.
- Amounts owed (30%): Factors in your monthly credit balances, as well as the ratio of balances to credit limits and of debts to original amounts borrowed.
- Length of credit history (15%): Factors in the ages of your accounts as well as the time since the accounts were last active. Generally, longer is better as long as payments have been on-time.
- New Credit (10%): Factors in the number and age of recently opened accounts.
- Types of credit (10%): Factors in the variety of credit types you’re using (credit cards, installment plans, mortgages, etc.). The more complex the credit is (mortgages, for example, are complex) the more points you’ll score for successfully managing it.
Why Does My Credit Score Matter?
Your credit score is an indicator of how you handle borrowed money and how likely you are to pay it back on time. Therefore, financial institutions look closely at credit scores when deciding whether to grant loans and what the interest rates on any loans should be. That said, your credit score might be a major factor in whether you are able to obtain a credit card, purchase a home or car, or secure certain kinds of student loans. In general, the higher your credit score, the better rates you will be granted and the less interest you will have to pay, overall.
In addition, landlords, utility companies, and potential employers may reference your credit score when making decisions that affect you. Poor credit may lead to a missed job or rental opportunity, or might mean you need to provide a significantly higher deposit than normal to secure certain services.
What Can I do About My Credit Score?
The first step in taking control of your credit score is accessing your credit score to better understand what issues you’re facing, if any. A look at your credit report can also help you identify and address any mistakes made by others that are affecting your credit. Identifying the key problems you’re facing will help you form a plan of action, which may include strategies such as:
- deciding which accounts to keep open and which to close.
- establishing and maintaining an on-time payment schedule.
- getting current on any missed payments.
- establishing open and honest communication with creditors.
- understanding the right and wrong time for opening new accounts.
It’s important to remember, though, that there is no magic fix to raising a low credit score. It takes time and patience, an understanding of the specifics of the problem, and sticking to a strategy. In fact, trying for quick solutions like simply opening more credit lines can lower a credit score even further.
Credit Counseling at Wailuku Federal Credit Union
Luckily, Wailuku Federal Credit Union offers services to help you better understand and manage your credit. The credit counseling program at WFCU is open to members and non-members alike, and guides its participants, step-by-step, to a better understanding of how credit scores and reports are built and the importance of monitoring personal credit. WFCU’s experts walk you through detailed strategies for analyzing your personal credit situation, for raising a low credit score, and for maintaining good credit once it’s achieved.
It can be a long journey to good credit, but it’s an important one – so don't wait to take that first step.