March is Credit Education Month! This month is dedicated to raising awareness about the importance of credit while also providing you with the tools and knowledge you need to be able to manage your credit correctly. At Auburn Savings Bank we are committed to helping you build a strong financial literacy background, so you can make informed financial decisions.
Understanding Credit
Credit plays a significant role in your financial life. It affects your ability to borrow money, secure loans, or even rent an apartment. Being able to understand how credit works is crucial for maintaining a strong financial portfolio and achieving your short-term and long-term goals. There are several types of credit such as credit cards, personal loans, mortgages and more.
The Three Major Credit Bureaus
When it comes to your credit report and credit score there are three major credit bureaus that play a crucial role. These are Equifax, Experian, and TransUnion. These are the major bureaus that collect and maintain data on your credit history. Each bureau may have slightly different information, so it is important to check your credit report at each bureau to ensure it is accurate.
- Equifax: This is one of the oldest credit bureaus, founded in 1899. It provides credit reports, scores, and monitoring services for both consumers and businesses.
- Experian: Experian is known for offering credit reports, credit scores, and identity protection services. It also provides educational resources to help consumers understand what credit is.
- TransUnion: This credit bureau also offers credit monitoring and identity theft protection services while also collecting and analyzing credit information to provide credit reports and scores.
Each bureau may have slightly different information, so it is important to check your credit report at each agency to ensure it is accurate.
Practical Tips
Here are some practical tips to help guide you in your understanding of credit and how to set yourself up for success.
1. Understand Your Credit Report and Score
Your credit report and credit score are two different items that work together to determine your credit worthiness. Your credit report is a detailed record of your credit history including all your current and past lines of credit and their payment history. Your credit score is a number that represents your credit worthiness. This number is determined and influenced by several factors including your payment history, credit utilization, length of credit history, types of credit, and recent inquiries.
2. Make Payments on Time
Your payment history is the most crucial factor when it comes to your credit score. By paying your bills on time, including credit cards, a mortgage, utility bills, etc. you are keeping your accounts from becoming delinquent. Setting up automatic payments or calendar reminders is a great way to ensure that you do not miss a due date with one of your bills.
3. Keep Your Credit Utilization Low
Credit utilization is the ratio of your credit card balances to your credit card limit. You should make it a point to try to keep your credit utilization below 30% as often as you can. For example, if you have a credit card with a limit of $1,000 you should aim to keep the balance on your card below $300 each month.
4. Avoid Opening too Many New Accounts at Once
Each time you apply for a form of credit you receive a hard inquiry in your credit report. It is important not to apply for several new lines of credit at the same time as it could signal financial instability to lenders who are deciding if they are going to lend to you.
5. Pay Down Existing Debt
If you have existing debt you will want to focus on paying that down first. When deciding what debt to pay down you should pay attention to your high interest accounts. These are the types of accounts that are going to cost you the most as time goes on, so if you can pay those down first you will end up saving money. By reducing your overall debt, you will be improving your credit utilization which in turn will have a positive impact on your credit score.
6. Keep Old Accounts Open
The length of your credit history is another key factor that affects your credit score. By keeping some older accounts open it can help increase the average age of your accounts which can positively impact your score. Even if you have paid off a credit card it is recommended to keep that line of credit open to show the credit history. If you must close one of your credit accounts, try to close a newer one first.
7. Diversify Your Credit Mix
It is important to try and have a mix of credit accounts on your credit report such as a credit card, home loan, and other installment loan. By having a mix of credit accounts, you show potential lenders that you can manage payments for several types of accounts with different terms and conditions. Having a mix of accounts is also a fantastic way to boost your credit score overall.
8. Monitor Your Credit Regularly
Stay on top of your credit by checking your credit report and score on a regular basis. This can help you identify errors or signs of fraud early on. You can obtain a free credit report annually from each of the three major credit bureaus which are: Equifax, Experian, and TransUnion.
9. Stay Informed about Credit Changes
Credit score models and reporting practices can change over time. Be sure to stay informed about the most current practices and recent changes that may affect your credit score or adjust your financial management strategies.
10. Seek Professional Help
If you are struggling to build or improve your credit, consider reaching out to a financial advisor or credit counselor for advice. They are experts who can provide you with personalized advice and help you create a plan to achieve your financial goals.
Building good credit takes time and responsible financial habits. By following these tips, you can take control of your credit and create a brighter financial future for yourself and your family. At Auburn Savings Bank we are here to support you every step of the way.