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Love it or hate it, your credit score is an essential piece of your financial puzzle: a good score opens doors, while a poor one can block you from valuable financing options.
Do you know enough about your credit score and how it impacts your daily life? Knowledge is power, and understanding the workings behind your score goes a long way in helping you achieve your financial goals.
On average, Americans’ credit scores are increasing and are considered to be in the “good” range. However, there are massive gaps in our knowledge of credit scores and the reasons behind that mysterious number. Approximately a quarter of Americans don’t know their credit score, which could be detrimental to achieving lifelong goals such as buying a house or a new vehicle. Read on to learn hacks to raise your credit score and set yourself up for financial success.
Credit Scores: 101
Your credit score is a three-digit number, ranging from 300 (the lowest possible score) to 850 (the highest). Lenders use this number to decide whether to offer you credit – such as a credit card, car loan, or mortgage loan. Your credit score is also used to determine the terms of the offer – what your interest rate will be and whether or not you’ll have to make a down payment.
Your credit score is calculated by looking at the following categories:
The average credit score in the United States is approximately 714, which is considered "good." If we break this down by generation, Baby Boomers tend to have a score of 742. Generation X is lower at 706, while Millennials have an average score of 687.
Different credit agencies have slight variations on what’s considered a “poor” or “good” score, but here’s a simple breakdown of how FICO views credit scores:
Obtaining and reading your credit report
Curious about your credit score? There are numerous ways to check your score without impacting your credit (more on credit pulls can be found below). Services like the government’s free annual credit report website, Credit Karma or Credit Sesame are viable options, and your financial institution or lender might provide your credit score free.
Now that you have your report, you’ll need to know how to read it. Credit reports are filled with important information and it can feel overwhelming at first glance.
First, you’ll typically see your personal information including your name, social security number, date of birth, home address, and more. Employer information is often included in this section to help verify your identity. There is also a section containing consumer statements, which includes anything you’ve submitted to the credit bureau, such as disputes on reported information.
The area containing account information will detail where you’re utilizing credit, such as car loans, mortgages, and student loans. Also included: payment history, credit utilization (read more about that below), loan payment status, and more.
Next, you can view items on your public records, such as foreclosures, tax liens, or bankruptcies, all of which can negatively impact your score. Last, you’ll find a section detailing credit inquiries. Hard inquiries are credit checks to take on debt, and soft inquiries are when your report is pulled, but you aren’t applying for credit. Hard inquiries can impact your credit score negatively, especially if there are several in a short period.
Not only is this valuable information for you as a consumer, but checking your credit report is an excellent way to prevent identity theft. Scour your report and ensure that no one is applying for credit in your name.
It is also critical to verify that all the included information is accurate and up-to-date and dispute any errors. The Federal Trade Commission indicates that there is a mistake on one of every five credit reports, and this could make a big difference if you’re looking to apply for a loan or credit card. To dispute an error, gather documents that help prove your case and contact the agency that issued the report.
Now that we know what a credit score is and what classifies as good, the next question is: why is your credit score significant?
Consider your credit score like a report card you used to get in school. Your report card measures your progress during the school year, and your credit activity puts you into a scoring range. However, unlike grades, credit scores aren’t stored as part of your credit history. Instead, your score is generated each time you apply for credit. It negatively impacts your credit score if you have multiple inquiries in a short period.
It is worthwhile to consider several key questions such as: what are your primary financial goals? Would you like to buy a home? Are you considering purchasing a car? Your credit will likely be a factor in framing that financing picture. Your score will tell a lender whether or not you qualify for a loan and the better your score, the more favorable your loan terms. For instance, the lower your credit score is, the higher your interest rate on a car loan will be.
If you’ve looked at your credit report and are surprised to see it’s lower than you thought, don’t worry: negative items on your credit score aren’t permanent. As time passes and you work to improve your score, those dings carry less weight. Also, most negative items in your credit report disappear after seven years due to the Fair Credit Reporting Act. However, bankruptcy can stay on your report for up to a decade.
How to raise your credit score:
Beware of these common credit score myths!
Many Americans hold misconceptions about improving their score, such as carrying a small credit card balance to bump your numbers up (which, to be clear, isn’t the case!). Most of us didn’t receive formal financial literacy education, so it makes sense that plenty of myths exist. Here are the most common myths and the facts to help clear up the confusion:
Myth #1: Checking your report hurts your credit score
Whether you are looking to improve your credit score or you're starting from scratch, we have several ways to start you on the right path. Stop by one of our branches today or give us a call to see what options are available.
Love it or hate it, your credit score is an essential piece of your financial puzzle: a good score opens doors, while a poor one can block you from valuable financing options.
Do you know enough about your credit score and how it impacts your daily life? Knowledge is power, and understanding the workings behind your score goes a long way in helping you achieve your financial goals.
On average, Americans’ credit scores are increasing and are considered to be in the “good” range. However, there are massive gaps in our knowledge of credit scores and the reasons behind that mysterious number. Approximately a quarter of Americans don’t know their credit score, which could be detrimental to achieving lifelong goals such as buying a house or a new vehicle. Read on to learn hacks to raise your credit score and set yourself up for financial success.
Credit Scores: 101
Your credit score is a three-digit number, ranging from 300 (the lowest possible score) to 850 (the highest). Lenders use this number to decide whether to offer you credit – such as a credit card, car loan, or mortgage loan. Your credit score is also used to determine the terms of the offer – what your interest rate will be and whether or not you’ll have to make a down payment.
Your credit score is calculated by looking at the following categories:
- Payment history
- Your income-to-debt ratio
- Total debt
- Length of credit history
- Types of open credit
- Public records (such as bankruptcy)
- Number of inquiries for your credit report
- New credit
The average credit score in the United States is approximately 714, which is considered "good." If we break this down by generation, Baby Boomers tend to have a score of 742. Generation X is lower at 706, while Millennials have an average score of 687.
Different credit agencies have slight variations on what’s considered a “poor” or “good” score, but here’s a simple breakdown of how FICO views credit scores:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
Obtaining and reading your credit report
Curious about your credit score? There are numerous ways to check your score without impacting your credit (more on credit pulls can be found below). Services like the government’s free annual credit report website, Credit Karma or Credit Sesame are viable options, and your financial institution or lender might provide your credit score free.
Now that you have your report, you’ll need to know how to read it. Credit reports are filled with important information and it can feel overwhelming at first glance.
First, you’ll typically see your personal information including your name, social security number, date of birth, home address, and more. Employer information is often included in this section to help verify your identity. There is also a section containing consumer statements, which includes anything you’ve submitted to the credit bureau, such as disputes on reported information.
The area containing account information will detail where you’re utilizing credit, such as car loans, mortgages, and student loans. Also included: payment history, credit utilization (read more about that below), loan payment status, and more.
Next, you can view items on your public records, such as foreclosures, tax liens, or bankruptcies, all of which can negatively impact your score. Last, you’ll find a section detailing credit inquiries. Hard inquiries are credit checks to take on debt, and soft inquiries are when your report is pulled, but you aren’t applying for credit. Hard inquiries can impact your credit score negatively, especially if there are several in a short period.
Not only is this valuable information for you as a consumer, but checking your credit report is an excellent way to prevent identity theft. Scour your report and ensure that no one is applying for credit in your name.
It is also critical to verify that all the included information is accurate and up-to-date and dispute any errors. The Federal Trade Commission indicates that there is a mistake on one of every five credit reports, and this could make a big difference if you’re looking to apply for a loan or credit card. To dispute an error, gather documents that help prove your case and contact the agency that issued the report.
Now that we know what a credit score is and what classifies as good, the next question is: why is your credit score significant?
Consider your credit score like a report card you used to get in school. Your report card measures your progress during the school year, and your credit activity puts you into a scoring range. However, unlike grades, credit scores aren’t stored as part of your credit history. Instead, your score is generated each time you apply for credit. It negatively impacts your credit score if you have multiple inquiries in a short period.
It is worthwhile to consider several key questions such as: what are your primary financial goals? Would you like to buy a home? Are you considering purchasing a car? Your credit will likely be a factor in framing that financing picture. Your score will tell a lender whether or not you qualify for a loan and the better your score, the more favorable your loan terms. For instance, the lower your credit score is, the higher your interest rate on a car loan will be.
If you’ve looked at your credit report and are surprised to see it’s lower than you thought, don’t worry: negative items on your credit score aren’t permanent. As time passes and you work to improve your score, those dings carry less weight. Also, most negative items in your credit report disappear after seven years due to the Fair Credit Reporting Act. However, bankruptcy can stay on your report for up to a decade.
How to raise your credit score:
- Pay your bills on time. That goes for all your accounts, not just credit cards and loans. Payment history is your credit score’s most heavily weighted factor, as it makes up 35% of your credit score.
- Keep your credit card balances low. Credit history accounts for 15% of your credit score and as a result, it might be worth it to keep those old accounts open even if you don’t use them.
- Space out your credit applications. Each time you apply for a line of credit, the inquiry is noted on your credit report. One or two inquiries won't impact your score negatively, but when you have a bunch within two years, it can cause your score to fall.
- Mix up your credit. Your credit mix, or the types of credit accounts you have, accounts for 10% of your credit score. Lenders want to see that you can use different types of credit responsibly.
Beware of these common credit score myths!
Many Americans hold misconceptions about improving their score, such as carrying a small credit card balance to bump your numbers up (which, to be clear, isn’t the case!). Most of us didn’t receive formal financial literacy education, so it makes sense that plenty of myths exist. Here are the most common myths and the facts to help clear up the confusion:
Myth #1: Checking your report hurts your credit score
- Reality: It’s easy to see this myth’s origin since it is partially true. If you apply for credit, your score will be affected. However, you can look at your score without hurting your credit.
- Reality: Not quite! There are three major credit reporting agencies, each giving you a score: Equifax, Experian and TransUnion. All of this information is used by lenders when looking at financing options.
- Reality: This might sound logical, but the opposite is true: you might hurt your score by doing so! Creditors look at the amount of available credit and how much you use, which is called your credit utilization ratio. When you close a card, that ratio goes up.
- Reality: Your credit score is a reflection of your credit history and yours alone. Your spouse, partner, roommates and family members all have their scores. A joint loan application considers both your and your spouse’s scores, but your relationship doesn’t play a role in the number.
Whether you are looking to improve your credit score or you're starting from scratch, we have several ways to start you on the right path. Stop by one of our branches today or give us a call to see what options are available.