Demystifying Your Credit Score-What You Need to Know

 <p>If you’re over 30, there’s a good chance you didn’t grow up learning about your credit score—how important it is to your financial health and how to keep yours in tip-top condition. Instead, you’ve probably had to proactively learn about it as an adult.</p>&nbsp;<p>Since credit is not the easiest (or most exciting!) topic to learn about, <a href="/?icid=ia-sm-blog-rm-generalongoing2020-credit-sept2020DemystifyingYourCreditScoreWhatYouNeedToKnow" target="_blank">Mountain America Credit Union</a> is here to help. In this podcast, we talk credit and break down all things credit score-related.</p>&nbsp;<h5><span style="color:#000000;">What is a credit score?</span></h5><p>Your credit score is very important to your overall financial health. Why? Because it determines if you’ll qualify for things like loans and credit cards—things we all need at some point in our lives—and what interest rate you’ll receive.</p>&nbsp;<div class="video-responsive"><iframe allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/-qvV8L1r1OQ"></iframe></div>&nbsp;<p>There are several scoring models out there. Different financial institutions may use different models. Overall, your <a href="/services/online-banking/credit-score-plus?icid=ia-sm-blog-rm-generalongoing2020-credit-sept2020DemystifyingYourCreditScoreWhatYouNeedToKnow" target="_blank">credit score</a> is tabulated from information provided by lenders. Credit reporting agencies (like <a href="https://www.experian.com/" target="_blank">Experian</a>, <a href="https://www.equifax.com/personal/" target="_blank">Equifax</a> and <a href="https://www.transunion.com/" target="_blank">TransUnion</a>) collect loan data including your credit limits, balances and whether or not the payments have been made on time. This data is applied to an algorithm that determines your credit score and helps lenders evaluate the likelihood that the person applying for credit will pay back the loan on time, based on their past behavior.</p>&nbsp;<h5><span style="color:#000000;">How is a credit score calculated?</span></h5><p>No matter the scoring model, there are <a href="/education/financial-education/5-ways-to-improve-your-credit-score?icid=ia-sm-blog-rm-generalongoing2020-credit-sept2020DemystifyingYourCreditScoreWhatYouNeedToKnow" target="_blank">several components that make up your credit score</a>. Here are the three that make up the bulk of your score:</p>&nbsp;<ul> <li> <p><strong>Payment history</strong>—A few late payments may&nbsp;not be an automatic “score-killer,” but chronic missed or late payments can negatively impact your credit score. It’s not always easy to pay on time, but do your best to stay current and pay at least the minimum amount by the deadline.</p> </li> <li> <p><strong>Utilization rate</strong>—This is the amount of credit you have used compared to the total amount of credit you have available (credit limit). For example, if you have a credit limit of $5,000 and you’re carrying a balance of $2,000, this would be a utilization rate of 40%. The lower your utilization, the better your chances of a higher credit score. Shoot for a utilization rate of 30% or less.</p> </li> <li> <p><strong>Time</strong>—The more recent the negative reports on your credit are, the more predictive they are. In other words, if you have several late or missed payments recently—say, in the last year—these may count more than late or missed payments further in the past.</p> </li></ul>&nbsp;<h5><span style="color:#000000;">What is a good credit score?</span></h5><p>Typically, credit models have scores between 350 and 850. Most consider a good credit score to start somewhere around 680 or 690.</p>&nbsp;<p>Once your credit score is in the mid-700s and above, qualifying for loans and credit cards or getting a good interest rate will be much more likely. Higher credit scores demonstrate responsible past credit behavior, which makes potential lenders and creditors more confident when evaluating a request for credit.</p>&nbsp;<h5><span style="color:#000000;">How can I view my credit score?</span></h5><p>Most financial institutions and many credit card companies provide your credit score for free in their online or mobile banking platforms. If you don’t have access to any of these avenues, you can purchase your credit score online from Experian, Equifax and TransUnion.</p>&nbsp;<p>It’s also a good idea to review your complete credit report annually. Get a free credit report, once per year, from each of these agencies. Just visit <a href="https://www.annualcreditreport.com/index.action" target="_blank">annualcreditreport.com</a> to get started.</p>&nbsp;<div class="video-responsive"><iframe allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/lL2GWE6k6Hk"></iframe></div>&nbsp;<h5><span style="color:#000000;">How can I build my credit?</span></h5><p>Most people are trying to increase their credit score. But there are many who are <a href="/must-reads/community/my-member-story-terence-white?icid=ia-sm-blog-rm-generalongoing2020-credit-sept2020DemystifyingYourCreditScoreWhatYouNeedToKnow" target="_blank">trying to build it from scratch</a>—either because they are just starting out&nbsp;or&nbsp;they have never applied for credit before.</p>&nbsp;<p>If, for whatever reason, you believe now is the time to start building your credit, you have two primary options.</p>&nbsp;<ul> <li> <p><strong>Start small</strong>—Get a credit card with a low limit—like $500 or $1,000. Something that can’t get you in too far over your head. Use it sparingly, for a tank of gas or a couple of grocery runs each month. Then pay it off in full with money you budgeted ahead of time. Keep your utilization under 30% as much as you can. Then, after a while, ask for a limit increase or apply for another credit card or loan. With a good payment history, you are now more likely to qualify for other types of loans.</p> </li> <li> <p><strong>Make down payments</strong>—If you’re looking for a car loan or something similar, save your money for a hefty down payment. Lenders are more likely to approve a loan—even for someone with no credit history—if they are willing to meet them halfway (or so). Want to buy a $12,000 car? It’s tough to get approved without credit. But put $5,000 or more down, and it’s now a different ball game. Once you’re approved for the loan, practice responsible payment habits.</p> </li></ul>&nbsp;<h5><span style="color:#000000;">Can I establish credit without spending a lot in interest fees?</span></h5><p>If you have cash and want to focus on building your credit without paying more in interest fees, we have some good news for you, too.</p>&nbsp;<p>Did you know that it’s possible to use a credit card and not pay a dime in interest? That’s right! Just use your credit card for everyday expenses—like groceries, streaming services and gas—and then pay it off in full before the due date with the money in your checking account. If you pay off the charges in the same billing cycle, you are not charged any interest.</p>&nbsp;<p>Even with no credit, you should be able to secure a credit card with a low limit. Once you have that card, start using it for your everyday expenses and then pay it off each month. If it’s easier, you can make multiple payments each month—weekly or even daily.</p>&nbsp;<p>With this strategy, you’ll build your credit without going into debt!</p>&nbsp;<h5><span style="color:#000000;">How can Mountain America help?</span></h5><p>Simply put, credit cards and various types of loans are financial tools. Yes, they help you buy the things you want and need, but they also contribute to your credit score, which is something you’ll need throughout your whole life. Using these tools responsibly over time and paying them off as agreed is how you keep your credit score in good working order.</p>&nbsp;<p>Think of credit as a form of trust with financial institutions, like <a href="/?icid=ia-sm-blog-rm-generalongoing2020-credit-sept2020DemystifyingYourCreditScoreWhatYouNeedToKnow" target="_blank">Mountain America</a>. As you build credit, you build trust with potential lenders over time, making it more likely for them to lend you money in the future.<br/><br/>&nbsp;</p>