Your credit score is determined by many factors. It affects just about everything including housing, insurance rates, employment, as well as loan rates and loan eligibility. That’s why knowing what makes your credit score go up or down is important to your overall financial wellness. Here are some helpful tips about how your credit score is calculated, how it affects your life and how to improve your credit score.
How is my credit score calculated?
There are three major credit bureaus in the U.S.—Experian, TransUnion and Equifax. Each one collects and shares information about your credit usage with potential lenders and financial institutions. Normally, your credit report is available every 12 months from all three credit bureaus. Given the vast number of consumers’ financial health being impacted by the current economic conditions due to COVID-19, online access to your report is now available on a weekly basis. Visit AnnualCreditReport.com and follow the prompts.
Most lenders use this information along with the FICO scoring model to calculate your credit worthiness. As a Partner Colorado member, you can view your FICO Score through our Mobile Banking App. This is a great way to understand your credit and avoid surprises. Some lenders may use the VantageScore model instead of FICO.
While there are several slight differences between the FICO and the VantageScore formulas, both scoring models look at the following factors when calculating your score.
- The age of your credit. When was your first account added to your credit file? When was your first loan or credit card? An older credit history generally boosts your score.
- The history of your bill payments. Other factors include the timeliness of your bill payments. Are you paying all of your monthly bills on time? Chronic late payments, particularly loan and credit card payments, can drastically reduce your credit score.
- The ratio of your outstanding debt to available credit. The VantageScore formula views consumers with a lot of available credit as a liability, while the FICO formula considers this a point in your favor.
- The diversity of your credit. Lenders want to see that you’ve had a variety of open credit lines. For example, you may be paying down an auto loan, a student loan and using three credit cards. Having different types of credit shows diversity.
- The trajectory of your debt. Are you accumulating new debt each month, or slowly working toward paying down every dollar you owe? It’s important to make sure you’re able to pay off existing debt before taking on more than you can handle.
- Your credit card usage. Financial experts recommend having several open credit cards to help boost your credit score, but this only works if you actually use the cards and pay off your bills on time each month. It doesn’t help much to have the cards sitting in your wallet not being used or overextending your credit card use and not being able to keep up with the payments.
How does my credit score affect my life?
Your credit score serves as a gauge for your financial wellness to anybody who is looking to get a better idea of how responsible you are with your financial commitments.
Here are a few examples of how your credit score can affect your day-to-day life.
- Loan eligibility. This is easily the most common use for your credit score. Lenders check your credit score to determine whether you’ll be eligible for a loan.
- The larger the loan, the stricter the requirements. A poor credit score can hold you back from buying a house, a car, or getting a personal loan.
- Interest rates on loans. Here too, your credit score plays a large role in your financial reality. A higher score can get you a lower interest rate on your loan, and a poor score can mean paying thousands of extra dollars in interest over the life of the loan.
- Employment. A study by the Society for Human Resources Management found that 47 percent of employers look at the credit scores of potential employees as part of the hiring process. Don’t let your credit score cost you your dream job.
- Renting. Many landlords run credit checks on new tenants before signing a lease agreement. A poor credit score can prevent you from landing that dream apartment or it can prompt your landlord to demand you make a higher deposit before moving in.
- Insurance coverage. Most insurers will check your credit before agreeing to provide you with coverage. Consumer Reports writes that a lower score can mean paying hundreds of dollars more for auto insurance coverage each year.
How to improve your credit score
If you’re planning on taking out a large loan in the near future, applying for a new job, renting a new place or you just want to improve your score, follow these steps.
- Pay your bills on time. If you have the income to cover it, but find getting things paid on time to be a challenge, consider using automatic payments. Online Bill Pay is an easy way to manage your bills. You can schedule automatic and recurring payments.
- Pay more than the minimum payment on your credit cards. Your credit score takes the trajectory of your debt into account. By paying more than just the minimum payment on your credit cards, you can show you’re working on paying down your debt and help improve your credit score.
- Pay your credit card bills before they’re due. If you can, it’s best to pay your credit card bills early. This way, more of your money will go toward paying down your outstanding balance instead of interest.
- Find out if you have any outstanding medical bills. You may have an unpaid medical bill you’ve forgotten about. These can significantly drag down your credit score, be sure to settle any outstanding medical bills as quickly as possible.
- Consider debt consolidation. If you’re paying interest on multiple outstanding debts each month, you may benefit from paying off your debt through a new credit card that offers a lower interest rate or from taking out a personal loan. This way, you’ll only have one lower-interest payment to make each month.
- Ask for help. As a Partner Colorado member, you can benefit from free financial counseling from GreenPath, Inc., a non-profit, financial wellness organization. A GreenPath counselor will work with you to review your financial situation and develop a personalized plan to meet your needs. Services include debt counseling, debt management, credit report review and more.
It’s crucial that you make the effort to improve and maintain your credit score. It’s more than just a number. It will impact your financial wellness for years to come.