This post is sponsored by Canopy Credit Union. Learn more about Canopy Credit Union here.
Understanding the ins and outs of credit scores is a crucial step towards financial wellness. In this article, we break down everything you need to know about your credit score, from who decides your score, how to check it, what impacts your score and what steps you can take to boost it.
At Canopy Credit Union, we know you are more than your credit score, and we’re passionate about giving chances to people who have been turned away from other financial institutions. However, we believe that empowering our community to learn about finances will help them continue to grow.
Why Does Having Good Credit Matter?
Many areas of life from lending to employment benefit from good credit. Having good credit improves access and lower cost for borrowing, housing (renting and buying), transportation, insurance, and more.
Applying for a loan or credit card to finance a purchase is essentially asking a lender to trust that you’re going to pay them back according to the terms you agree upon. Landlords, insurers and employers often use credit information to filter out applicants they may deem too risky. While it may not seem fair in some cases, lenders often see your credit score as a sign that the rest of your life is well managed and that you “take care of your business.”
What is a Good Credit Score?
Credit scores range from 300-850. This is the breakdown:
- Excellent (780-850)
- Good (660-779)
- Fair (600-659)
- Unfavorable (500-599)
- Deficient (300-499)
Aim for a credit score in the Excellent or Good categories. The better your score is, the more access you will have to lending opportunities and the less you will end up paying in interest. If your score is not looking too sunny, don’t fret. Keep reading for helpful tips on how to boost your score.
Who Decides my Credit Score?
In the United States, there are three credit reporting agencies: Experian, Equifax and TransUnion. Each reports and calculates your score differently. Financial institutions like credit unions and banks each use one of those reporting agencies and sometimes their own scoring models.
Over 200 credit report factors may be considered when calculating a score, and each model may weigh credit factors differently, so no scoring model is identical. This means, two different financial institutions could give you a different score. Or, if you go to two different websites to check your credit score, you could get slightly varied answers.
How to Check Your Credit Score
One of the easiest ways to check your credit score is by going online through one of the credit bureaus: Equifax, Experian and TransUnion. There are other free websites that will check your score (CreditKarma for example). Just be wary of who you give your personal information to. Pro-tip: if a website is asking you to pay to find out your credit score, opt for other options as there are so many free ways to find out.
Canopy members have access to a phenomenal, free tool: Savvy Money. With Savvy Money, members have access to their credit score, full credit report, credit monitoring, financial tips and credit building education.
What’s the Difference Between a Credit Score and a Credit Report?
While searching for your updated credit score, you might find information on your credit report. Your credit score is a numerical rating based off of the findings of your credit report which is a detailed record of your entire credit history as compiled by the credit bureaus. This report includes information about your credit accounts, payment history, credit inquiries and public records. Your credit report is used when lenders are evaluating applications for credit. Each year, you are entitled to a free copy of your credit report through annualcreditreport.com. It is wise to review your credit reports each year to make sure everything is correct.
What Makes up a Credit Score?
Your credit score is calculated by the credit reporting agencies with five factors. Each factor is weighed differently between the bureaus to make up the total score, with some factors mattering much more than others. The percentage breakdown below reflects the credit scoring model that Canopy Credit Union uses from TransUnion.
- Payment history – 40% of your score. Your history of on-time payments is the most important factor that makes up your credit score. Don’t be late. Don’t miss payments. Setting up automatic payments can help with making sure you are always on time.
- Credit usage – 23% of your score. Credit utilization is based on the overall amount of money you’ve spent on your credit cards or accounts that have credit limits. In order to look “less risky” to lenders, don’t use more than 30% of your total available credit across all your accounts. Doing so may indicate that you’re dependent on borrowing or simply overspending based on your income and ability to pay back. Pay down balances as much as possible each month. To keep within under 30% utilization, pay off cards multiple times a month or spread payments out on a variety of cards.
- Example: Alex has three credit cards. The first card has a limit of $1,000, the second a limit of $2,000 and the third a limit of $5,000. Together, her available credit is $8,000. To make sure she stays under a 30% utilization for her $8,000, Alex pays off her cards if she gets close to or above $2,400 in combined purchases across her cards.
- Credit age – 21% of your score. The longer your credit history, the more data is available to show creditors that you’re a good risk and you’ve proven it over time. Keep any credit cards you have active by making a purchase on each one every few months. Inactive accounts might be closed by the lender, which can reduce your average credit age and lower your credit score.
- Account mix – 11% of your score. Maybe you’re paying a mortgage, have paid off an auto loan and pay off your credit card balance each month. The ability to manage a variety of types of credit adds points to your score.
- Inquires – 5% of your score. Creditors checking your credit before making a lending decision can hurt your scores. It’s usually temporary but can cause your score to fall a few points. Wait at least 6 months between hard credit inquiries. Soft credit pulls (like checking your credit score on a free website) does not affect your credit score as it is more of a guess rather than a precise number.
How to Boost Your Credit Score
Now that you know what all goes into a credit score, it is smart to evaluate your own and see where you can improve. Run through these tips to make sure your credit report is squared away.
- Set a reminder to check your credit score frequently. It’s a great place to start. Knowing where you stand can help you make a game plan.
- Make sure to recognize any trends with the amount of credit you utilize so you can adjust your habits. After large purchases that put you over the suggested 30% utilization rate, make a point to pay off your card quickly.
- Keep up with payments. It’s the most important factor, and it will help your credit score see upward growth.
- Only apply for new accounts as needed. Opening up too many accounts at once can hurt your credit score.
Maintaining a healthy credit score can mean better access to the credit you need, when you need it. Taking smart steps to improve your credit will put you on track to financial wellness.
Talk to a Financial Coach Today
Apply your deeper understanding of your credit score and meet with Canopy’s financial coaches today. Financial coaches can help you make a plan to improve your credit score, explain to you how your financial decisions impact your overall score and help you on your journey to financial wellness. Meeting with a financial coach is always free and is available to anyone. Log on to canopycu.com/coach to sign up for an appointment today!