Understanding Your Credit Score
We hear a lot of questions about credit scores, like how important is a good one, how do you protect it, and how can you improve it?
Understanding your credit score and how it’s determined can help you to improve yours, which can help when buying a vehicle or home in the future.
What is a credit score?
Simply put, your credit score is a number used by credit unions, banks, car dealerships and others to determine how much credit you qualify for, and how much interest they’ll charge you as you pay back a loan. Your number tells creditors how likely you are to make your loan payments.
The Fair Isaac Corp, known as FICO, devised the credit score number by looking at credit history – how you borrow and repay your debts.
Credit scores start at 300 and rise to 850, which is the best. The better your number, the better interest rates you’ll likely be eligible for. Scores under 580 are considered poor. Those 580-669 are fair; 670-739 are good; 740-799 are very good; 800-850 are exceptional. Experian says most people fall into the fair or good categories.
What factors determine your credit score?
- Your bill-paying history (35 percent)
Credit bureaus factor in late payments, including how often you pay late, by how many days, and how recent your late payment was. This also includes whether you’ve had any debts sent to collection, or had a foreclosure or bankruptcy. The best strategy to maintain a healthy credit score is to make payments on time.
- Your current debt compared to available credit (30 percent)
Higher debt loads can work against you. Credit scores are influence by the ratio of debt you have compared to the total amount of credit you can borrow. This is called the “credit utilization ratio”. People with the best credit scores tend to use less than 10% of available credit, but generally, a good credit utilization ratio is less than 30%. Anything above 50% can negatively impact your credit score.
- The number and types of loans you have (10 percent)
Some types of debt carry more authority than others, and people with top credit scores often have a diverse portfolio of credit accounts. For example, it’s possible to have too many credit cards but not enough of other types of loans, like mortgages or auto loans. The goal is to diversify.
- How long you’ve had loans (15 percent)
The longer you’ve had an account, the better. This factor is hard to change because it can’t be rushed. But if you give it time, you’ll see your credit score go up.
- New applications for credit (10 percent)
Every time you apply for credit, a lender files a hard inquiry to review your credit report as part of their decision-making process. Too many hard inquiries in a short amount of time can be a red flag, and can remain in your credit file for up to 2 years. If you have to make multiple inquiries at once, aim to do so within the same 45-day period so they’ll count as a single inquiry.
Credit Scores and Loans
At FFCU we consistently offer competitive rates on home loans, auto loans, personal loans and business loans. However, you may still be concerned about your credit score effecting your loan approval.
We’re here to help. Loan decisions are made locally by the people you trust at FFCU. We can help you get on the right financial track for future loans. Contact us today or visit one of our locations for personalized guidance.