How to Get Smart About Your Credit

Credit is an incredibly important factor of your financial health, but many of us shy away from looking at it, talking about it, or maintaining it. Don’t let this be you! Whether you’re new to credit, looking to fix it, or need to discuss credit with your children, the following advice is for you.

What is credit?

Let’s start at the very beginning—what is credit? According to Experian (one of the three credit bureaus of the country), credit is the ability to borrow money with the understanding that you’ll pay it back later. Credit can be in the form of credit cards, retail credit cards, personal or vehicle loans, student loans, mortgages, service credit and more.

Did you know? 79% of Americans have at least one credit card in 2020.

 

What’s a credit score?

A credit score is how you’re graded on your “credit worthiness.” This will determine from whom you’ll be able to receive credit, how much money you’ll be able to borrow, and details such as your interest rates. For a more thorough look into credit scores, check out our blog What is a Credit Score and How Can it Help Me?

Who needs to know about credit?

Everyone needs to know about credit! Children will benefit from learning about money basics with the understanding that credit is not “free” money, as many children seem to believe. Teens should learn about credit before or around the time they begin their first job or head off to college as they may need to apply for a vehicle or student loan. Adults need to be familiar with credit as it affects their ability to apply for a mortgage, for example.

Did you know? You can “freeze” your credit to discourage scammers, fraud, and identity theft by contacting all three credit reporting companies, Equifax, Experian, and TransUnion and requesting a “freeze.”

What affects credit?

There are several factors that can affect your credit both positively and negatively. To name a few that weigh on your score include:

  • Debts such as medical bills, car payments, utility bills, student loans and mortgages—all your debts are combined and compared with your income to determine borrowing ability
  • Age of accounts as in the longer they’ve been opened (the older they are), the more stable and reliable of a borrower you look like
  • Number of accounts in that too many accounts make you seem like a risky borrower, while only opening accounts you need make you a more responsible borrower.

 

How can I improve a bad credit score and maintain a good credit score?

If you’re looking to improve your credit score, be mindful that it takes time, patience, and consistency. If you see any “fix credit quick” messages online, it is a scam. When improving your credit, slow and steady wins the high score. Start here:

  • Determine your current debts and budget, avoid spending more than you earn
  • Avoid opening more credit lines to pay debt
  • Pay down balances with high interest first
  • Continue to make every payment on time, every time

 

If you’re looking to maintain a good credit score, keep these in mind:

  • Pay more than the minimum amount due, paying the entire balance is best
  • Check it often for mistakes or fraudulent activity
  • Keep credit utilization low by avoiding credit limits
  • Avoid closing old accounts—they help your credit age

 

How can I explain credit to my kids and teens?

What children and teenagers learn about money in their childhood will affect them into their adult years. Start early by teaching young children money basics (check out our KidsPlus program.) and that despite how it may seem, credit cards are not free money!

When talking with teenagers about credit and credit cards, it’s essential that they’re familiar with the following:

  • Managing their own money
  • How to create a budget
  • Balancing a checking account
  • Understand how interest works

 

Teenagers and younger children must be diligent and responsible not only with their money, but with the potential dangers of entering their personal information online. When discussing credit with your children, it’s also necessary to discuss scams, fraudulent activity, and the possibility of identity theft.

 

With “Get Smart About Your Credit Day” approaching this year on Thursday, October 21, we hope that you take the time to brush up on credit management and make a plan to support your credit health.

 

 

 

Sources: MoneyUnder30, Consumer Finance, The Balance, Experian,

https://www.moneyunder30.com/credit-repair

https://www.consumerfinance.gov/ask-cfpb/how-do-i-get-and-keep-a-good-credit-score-en-318/

https://www.thebalance.com/teach-your-child-about-credit-cards-960193

https://www.experian.com/blogs/ask-experian/credit-education/faqs/what-is-credit/

What’s a Credit a Score and How Can it Help Me?

What’s a Credit a Score and How Can it Help Me?

Confused by credit reports, scores and what makes them either good or bad? Think of your credit report as the complete history of your financial life thus far. It contains all the highs and lows of your financial decisions and is representative of your money management journey. Now, think of your credit score as the grade of your credit report. Both are incredibly important, but let’s dive a little deeper in your credit score.

What is a credit score?

A credit score is the 3-digit numerical grade that represents the history of your credit report. The higher the number, the better your credit score. There are two major credit scoring models, FICO and VantageScore. These models differ slightly, so you may have two different credit scores, although they should be similar and in the same range.

The credit score range by FICO looks like this:

  • Poor 300-579
  • Fair 580-669
  • Good 670-739
  • Very Good 740-799
  • Excellent 800-850

Keep in mind that what one lender may think of as a “good” score may be “fair” to another lender. You can get free credit checks many places including Experian.com, transunion.com, freescoreonline.com and creditkarma.com. If you check your credit score often, you’ll always know which range you fall into, giving you confidence and considerable consumer power.

How is my credit score determined?

When it comes to the actual scoring of your credit, there are a few important factors that account for different percentages of your score.

  • 35% – Payment history This is the most important factor. If a bill is 30 days past due, you can be penalized with a fee and up to 100 points off your credit score. That will stay on your credit report for seven years!
  • 30% – Credit utilization This refers to how high your balance is in relation to the limit on that particular line of credit. You’re safe keeping balances under 30% of your limits but under 3% is ideal.
  • 15% ­– Credit history This is the average age of all of your credit accounts. When you open new accounts, your credit score may fall slightly because the average age will change.
  • 10% – Credit diversity These are the different types of credit accounts you have (credit cards, student loans, auto loans, etc.). Having credit diversity can build up your credit by showing lenders that you’re financially responsible and can handle different kinds of accounts.
  • 10% – Credit Inquiries This happens when a lender runs a credit application (with your approval) and checks your credit history and score.

Pro Tip: By setting your bills to autopay, you’ll be helping your credit score increase.

Why is your score important?

A credit score in good standing will never go out of style. When you apply for loans or other types of credit, lenders will see your high score and know that you’re a safer bet than someone with a lower score. Having a high score takes patience (building credit history), consistency (always paying on time) and constraint (don’t open accounts that you don’t need). These three things alone will enhance your credit score over time. Also, a high credit score can save you money by being eligible for lower interest rates on different credit products (auto loans, credit cards, mortgages).

What can I do to raise my score?

Your everyday spending habits will be represented in your credit history and your credit score. Keep these in mind whenever you’re making a purchase or thinking about making a purchase:

  • Always pay your bills on time
  • Pay credit card balances in full each month or ASAP
  • Practice keeping low credit utilization
  • Stay out of debt by paying more than minimum balances and by spending within your means
  • Apply for lines of credit only when necessary

Having a credit history is not a bad thing—it can actually work in your favor. It’s all about your spending habits and how you approach money management. A good credit score can set you up for financial success, get you approval on a loan or mortgage request, and help you save money on future purchases.