It may only be three digits, but your credit score is a very important number in your life. This numerical representation of creditworthiness, based on your credit history and financial behavior, can help or hurt you when it comes time to apply for a mortgage or car loan, get a job that requires a credit check, and more. In this article, we’ll help you understand how your credit score is calculated so you can work on building and maintaining a good score.
What is a credit score?
Your credit score is a three-digit number ranging from about 300-850. Generally, 700+ is considered a good score and anything below 580 is considered poor.
To understand your credit score, you need to know how it’s calculated. While the exact formula varies slightly between credit bureaus and scoring models like FICO®, the primary factors include:
- Payment History (35%): Make consistent on-time payments to demonstrate a positive payment history with bills, credit cards, rent, and loans.
- Credit Utilization (30%): This refers to the ratio of available credit versus current credit balances. Credit utilization is most relevant to credit card accounts. You should aim to use no more than 30% of your available credit at any given time. For example, if you have a credit card limit of $1,000, aim to carry no more than a $300 balance, even if you pay it off every month.
- Length of Credit History (15%): This factor is the one you have the least control over. The younger you are, the shorter your credit history will be. However, you can maintain the length of your credit history by keeping your oldest accounts open, even if you no longer use them.
- New Credit (10%): Applying for new credit accounts, especially several at once, can temporarily hurt your credit score because it indicates financial distress. That’s why, if you’re applying for a mortgage, for example, it’s recommended that you don’t open any other new credit accounts.
- Credit Mix (10%): Lenders want to see that you can handle different types of credit, from term loans to credit cards, student loans, and more. So make sure you keep different types of credit accounts open, such as a small personal loan or a credit card you use for one purchase a month.
Where to Find Your Credit Score Information
Monitoring your credit score is an important part of your overall financial health. You may be able to view your credit score as a free benefit with your credit card account. If not, Credit Karma and Credit Sesame are both apps that offer free access to your TransUnion and Equifax credit scores. All three major credit bureaus use the VantageScore model to calculate credit scores. You can check your FICO score for free through myFICO.
Understanding Your Credit Report
In addition to checking your credit score, it’s important to periodically review your credit report as well. You can obtain free weekly credit reports from each of the three major credit bureaus via AnnualCreditReport.com. Make sure you visit the website that is “the only source for your free credit reports, authorized by federal law” before you enter any personal information.
The information on your credit report informs your credit score. If you see any erroneous or suspicious information on your credit report, contact the credit bureau to dispute information.
There are various identity theft monitoring services available at a variety of monthly and annual price points. You can review the options and decide if one is right for you or if you prefer to monitor your credit score and report on your own.
How to Improve Your Credit Score
If your credit score isn’t where you’d like it to be, there are steps you can take to improve it. Just keep in mind that these usually take some time. If you’re trying to improve your score before applying for a car or home loan, or a new rental home, it won’t happen overnight (unless credit utilization is weighing you down and you suddenly come into a lump sum of money you can pay off your debt with).
Depending on the method you use to view your score, you may get insight into the factors that need correcting. For example:
- If late payments are an issue, set up reminders for yourself or use online billpay to autopay everything on the due date.
- If credit utilization is the problem, make a plan to pay down credit card balances. You could also ask your credit card issuer to raise your credit limit, which would lower the ratio. Another option is to consolidate credit card debt with a personal loan.
- Limit or avoid new credit applications.
Maintaining a Good Credit Score For The Long Term
It’s easy to forget about your credit score–until you need it for some reason. Then you need your score to be good enough to buy a car or a house, get that job or rent that apartment, and so on. Incorporate good habits into your routine to maintain a good score for the long-term.
- Consistent credit monitoring: Regular checks for accuracy and fraud.
- Diversifying credit types: Healthy mix of credit cards, loans, and mortgages.
- Age of credit accounts: Older accounts can positively impact your score, so leave that first credit card open, even if you no longer use it.
- Budgeting: This is one of the foundations of strong financial health. Creating and sticking to a budget gives you more control over your money, including spending and saving.
- Saving: This is another important part of your financial health. Build an emergency savings fund so that life’s unexpected events won’t throw you into debt or leave you unable to pay a bill on time.
About Palisades Credit Union
Founded in 1941, Palisades Credit Union serves all persons who live, work, worship, or attend school in Rockland County, New York; Bergen County, New Jersey; employees of the State of New York who work in one of the five New York City boroughs; members of Radio and Television Broadcast Engineers Local 1212; International Brotherhood of Electrical Workers, AFL-CIO, in New York, NY; and employees of USA Networks who work in or are paid from New York, NY. Our mission is better banking, better solutions. Have questions about your credit score or want to become a Palisades Credit Union member? Contact us or visit one of our branch locations. We look forward to providing you with the right financial solutions to meet your needs.
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