A Closer Look at Credit

Used wisely, credit can be an excellent tool for helping you achieve your financial goals. To help put you on that path, we’ve collected some of the questions our representatives are asked most often, along with the answers.  

What Is Credit?
Credit is a tool you can use to improve your financial health. Credit can empower you to get the things you need today based on a promise you make to pay for them in the future. You pay for this extra time in the form of interest. Using credit is easy, but maintaining a healthy balance between spending, saving, borrowing, and planning for your future is essential. Working to improve your credit helps ensure you’ll qualify for these loans when you need them.

How Are Credit Scores Calculated?
Your credit score is a number that represents the risk a lender takes when they lend you money. The score is calculated based on the loan information on your credit report. A FICO^® score is today’s most commonly used credit score. Not only do creditors typically check your score before they approve an application, but they also use it when determining what interest rate to charge you. A good score can help you achieve your goals at the lowest possible cost. FICO scores range from 300 to 850. Generally, those with a higher score are granted credit most easily and get a better rate. Here’s how the numbers break down:

• Poor < 580
• Fair 580–669
• Good 670–739
• Very Good 740–799
• Exceptional 800+50

Your credit score is composed of five important components that are largely within your control. Understanding these factors is the best first step to an exceptional credit score:

• Payment History (35%)
• Amounts Owed (30%)
• Length of Credit History (15%)
• New Credit (10%)
• Credit Mix (10%)

Understanding how a credit score is calculated is good to know, but understanding what actions you can take to impact those components positively is even better.

How Do I Manage Debt?
You manage debt by taking charge of your Payment History and Amounts Owed. Payment History is the largest component of your credit score. Making your payments on time boosts your score. Conversely, when you make a late payment, your score decreases and the more late or missed payments you have, the lower your score. Action Item: Pay your bills on time, every time.

The overall amount of debt you have is the second largest factor in your score. Carrying balances on credit cards or lines of credit at more than 30% of your credit limit will bring down your score. Action Item: Know your credit limits, and keep your Amounts Owed at less than 30% of those limits.

How Do I Build Credit?
You build credit by managing your Length of Credit History and New Credit. The longer you’ve had credit, the better, but we all start somewhere. Your Length of Credit History considers recently opened accounts and the number of inquiries. Accessing your report for educational purposes is not damaging to your score. However, having too many new accounts can bring down your score. Action Item: Only open accounts you’re sure you need.

Also, understand the Credit Mix component. Having a variety of accounts can boost your score because it demonstrates that you are capable of handling the responsibilities that come with each debt type, including credit cards, lines of credit, personal loans, auto loans, and mortgages. Action Item: Try to maintain a variety of accounts.

When it comes to credit, be patient, and consider talking to a professional who can review your specific strengths and opportunities