Credit Scores play an important part in everyday life. Your Credit Score may have an effect on loan rates, insurance rates, and rental/lease agreements. Credit scores serve as an indicator of your financial history and responsibility. Your credit score also represents your ability and willingness to repay financial obligations. To find out what your credit score is, simply sign up for our free service, Savvy Money. You will be able to check your credit score, payment history, credit usage, and even dispute your report. You will get tips on how to improve your score and ways to save money with PFCU through exclusive offers designed just for you.
How is my credit score calculated?
No one really knows the exact formula. However, there are three major credit bureaus in the U.S.: Experian, TransUnion, and Equifax. Each one collects and provides information about your credit usage with potential lenders and financial institutions. Each bureau will issue a credit score based on the information provided to that bureau. Most lenders use this information along with the FICO scoring model to calculate your creditworthiness. Some lenders may use the VantageScore model instead of FICO. Vantage scores are most likely used in conjunction with advertising. For example, the credit scores provided by your credit card company on your monthly statement is most likely a VantageScore.
Certain features are weighted differently with each scoring model. It is not unusual to have a higher VantageScore than the FICO score. Several factors that may have a negative effect on your score include but are not limited to; missed payments, payments made later than 30 days or more after the due date, high balances on credit cards, collection activity, charged-off accounts, multiple recent inquiries (within the last 12 months), and recently opened new accounts. .
We have outlined why it matters and steps you can take to improve your score.
While there are several slight differences between the FICO and the VantageScore formulas, both scoring models look at the following factors when calculating your score:
- The age of your credit. How long have you had your oldest credit card? When was your first loan? An older credit history generally boosts your score.
- The timeliness of your bill payments. Are you paying all of your monthly bills on time? Chronic late payments, particularly loan and credit card payments, can drastically reduce your score.
- The ratio of your outstanding debt to available credit. The VantageScore formula views consumers with a lot of available credit as a liability, while the FICO formula considers this a point in your favor.
- The diversity of your credit. Lenders want to see that you have and have had several kinds of open credit. For example, you may be paying down an auto loan, a student loan, and using three credit cards.
- The trajectory of your debt. Are you accumulating new debt each month, or slowly working toward paying down every dollar you owe?
- Your credit card usage. Financial experts recommend having several open credit cards to help boost your credit score, but this only works if you actually use the cards and pay off your bills each month. It doesn’t help much to have the cards sitting in your wallet.
How does my credit score affect my life?
Your credit score serves as a gauge for your financial wellness to anybody who is looking to get a better idea of how responsible you are with your financial commitments.
Here are just some ways your credit score can affect your day-to-day life:
- Loan eligibility. This is easily the most common use for your credit score. Lenders check your score to determine whether you will be eligible for a loan. A poor credit score can hold you back from buying a house, a car, or getting a personal loan.
- Interest rates on loans. Here too, your credit score plays a large role in your financial reality. A higher score can get you a lower interest rate on your loan, and a poor score can mean paying thousands of extra dollars in interest over the life of the loan.
- Renting/Leasing. Many landlords run credit checks on new tenants before signing a lease agreement. A poor credit score can prevent you from landing that dream apartment, or it can prompt your landlord to demand you make a higher deposit before moving in.
- Insurance Coverage and Insurance Premiums. Most insurers will check your credit before agreeing to provide you with coverage. Consumer Reports writes that a lower score can mean paying hundreds of dollars more for auto coverage each year.
How to improve your credit score
If you’re planning on taking out a large loan in the near future, applying for a new job, renting a new unit or you just want to improve your score, follow these steps:
- Pay your bills on time. If you have the income to cover it but find getting things paid on time to be a challenge, consider using automatic payments.
- Pay more than the minimum payment on your credit cards. Your credit score takes the trajectory of your debt into account. By paying more than just the minimum payment on your credit cards, you can show you’re working on paying down your debt and help improve your score.
- Pay your credit card bills before they’re due. If you can, it’s best to pay your credit card bills early. This way, more of your money will go toward paying down your outstanding balance instead of interest.
- Find out if you have any outstanding medical bills. You may have an unpaid medical bill you’ve forgotten about. These can significantly drag down your credit score, so be sure to settle any outstanding medical bills as quickly as possible.
- Consider debt consolidation. If you’re paying interest on multiple outstanding debts each month, you may benefit from paying off your debt through a new credit card that offers an introductory interest-free period, or from taking out a personal loan at Partnership Financial Credit Union. This way, you’ll only have one low-interest or interest-free payment to make each month. (Note: If you’ll be applying for a large loan within the next few months, it’s better not to open any new cards.)
It’s crucial that you make the effort to improve and maintain your credit score. It’s more than just a number; it will impact your financial wellness for years to come.