The Key to Scoring a Good Credit Standing: It’s all in the Numbers
The famous quote “Give credit where credit is due”, certainly rings true when you’re looking to finance a large purchase. That’s when you discover just how creditworthy you really are. According to a lender’s assessment, creditworthiness is a measure of whether you are more likely to default on your debt obligations or to pay them back in a timely manner. One of the first things lenders do to get their answer is to run a credit report - the results of which can make or break you. That’s because your credit score is more than just a number – it’s a blueprint of your spending behavior and every financial decision (good or bad) that you’ve made over the past several years.Lenders and even landlords or insurance companies rely on your credit information to make decisions about lending you money, renting you an apartment or even pricing an insurance policy. That’s why it’s important to know how you score - not just the number, but how it’s calculated. There are situations that can cause your score to be higher one month and lower the next. That’s because there are many factors that go into the calculation of your score so it’s important to understand how they affect the outcome.
First, let’s start with the basics - the ins and outs of credit and how to ensure you are getting all the credit you are due. Remember, the higher your score the more benefits you will receive in the way of lower rates on credit cards, insurance, etc. You are likely to receive higher credit limits and financing as well.
What is a Credit Score?
A credit score is a number that’s assigned to a person that gives lenders an idea of how well you could pay back a loan. The higher the number, the higher the probability that the loan will be repaid on time. There are different types of credit scores, but the most commonly used model is the FICO® credit score.
How it all adds up
Many banks use FICO® scores to determine your creditworthiness. This score is derived from three different credit reporting agencies, Experian, Equifax and TransUnion, who all collect data on your credit behaviors throughout your life. FICO® then assigns each person a score between 300 and 850.
Your credit score is calculated based on the following five categories:
1. Payment History = 35% of Credit Score
This largest portion of your credit score is determined by how often you pay your payments on time. Late payments may lead to a lower credit score. Use online and mobile banking to set up recurring or one-time payments to help ensure you never miss a payment.
2. Amount Owed = 30% of Credit Score
The total amount of debt you owe represents 30 percent of your score. Less is more in terms of a higher credit score.
3. Length of Credit History = 15% of Credit Score
Not having a credit history can hurt your score. The longer record you have of making timely payments, the higher your score will be.
4. Credit Mix Currently in Use = 10% of Credit Score
The types of credit used is another factor. Having experience repaying several types of loan commitments, like a combination of a car loan and a credit card, will help boost your score.
5. New Credit = 10% of Credit Score
New credit is a category that considers what new loans or credit cards you’ve recently taken on. Taking on several new debts in a short period can lower your number.
What’s a Good Credit Score?
At Premier Bank, we get asked this a lot. A credit score of 640 or higher usually allows you to qualify for most loan products, but a credit score of 680 is typically viewed as a "good" credit score. While the calculations for a credit score seem complex, there are several simple things you can do to increase your score, including keeping revolving debt, like credit cards, below 50 percent of the credit limit, paying your bills on time and not pulling your credit report too often.
What Damages Your Credit Score?
There are activities that you may be engaging in that you didn’t even realize could damage your credit score. Here’s what to avoid:
- Paying less than the minimum
- Paying just the minimum
- Withholding payment during a dispute
- Closing a card with a high credit limit
- Adding an authorized user or becoming a co-signer
- Using a balance transfer card for purchases
- Applying for too many cards at once
- Bankruptcy Penalties for negative items on your credit score can range from 2-10 years.
Everyone is entitled to get a free credit report every twelve months from each credit reporting company. To get yours, simply visit annualcreditreport.com or call 1-877-322-8228. It is always a good idea to review your credit report annually, even if you are not currently seeking a loan. Sometimes errors happen and lower your score without you knowing! Once you get your credit report, check out this great article for ways to reduce your debt and pay off credit cards.
A credit score can seem like a mysterious number that has considerable impact on your ability to borrow money, but it is important to take time to know your credit score, understand how it is derived and how to build and protect it.
If you’d like to talk to one of our bankers about your credit score or creditworthiness, contact us for more information.