When applying for personal credit, the first thing that matters is your credit score. Just like a report card describes what kind of student you were, your credit score tells credit unions and other lenders what type of borrower you are. It indicates how well you’ve repaid loans in the past and how likely you are to repay a loan in the future.
Your credit score can determine not only whether you get a loan but also how much you pay in interest. A better credit score can save you hundreds or even thousands of dollars in interest.
Is your credit score good, average or bad? Here's how to tell – and what you can do to increase your credit score.
Check Yourself: Monitoring Your Credit Score
Monitoring your credit score is crucial. Accessing your FICO Score, a commonly used credit scoring model, is easy and available at any time. At Metro Credit Union, we share updated FICO scores with members quarterly via online banking under the tools section. Regularly checking your FICO Score helps you stay aware of changes in your credit profile, make informed decisions, and take steps to improve your credit if necessary.
FICO Credit Scores range from 300 to 850:
- Scores of at least 740 (45% of consumers) typically receive the best rates and terms.
- Anything between 670 and 740 (20%) is considered a good credit score, with borrowers generally able to get credit, though not always at the best rates.
- Scores below 670 are divided into:
- "Fair" (580-669)
- "Poor" (below 580)
Consumers with credit scores below 670 often face difficulties in obtaining credit and, when they do, frequently pay higher interest rates.
Keep in mind, too, by law everyone is entitled to one free copy of their credit report every year from each of the three main credit reporting agencies. You can get yours at www.annualcreditreport.com. While valuable for ensuring there are no errors impacting your credit score, your free credit report does not include your score.
The FICO Score is composed of five key components:
Payment History (35%)
The most significant factor, making up 35% of your score, is your payment history. Consistent, on-time payments will improve your score, while late or missed payments will negatively impact it. The more frequent, recent, or severe missed payments are, the greater the damage to your score.
Amounts Owed (30%)
Thirty percent of your score is based on the amount you owe, particularly in relation to your available credit. Maxing out your accounts can harm your score, while keeping your balances at half your limits or below can help maintain a strong score.
Length of Credit History (15%)
The age of your accounts contributes 15% to your score. Generally, a longer credit history is better, as it provides more data for lenders to base their decisions on.
Credit Mix (10%)
Having a variety of credit types, such as credit cards, personal loans, mortgages, car loans, and installment loans, is beneficial and makes up 10% of your score. It demonstrates your ability to manage different types of credit.
New Credit (10%)
Opening many new accounts or having numerous credit inquiries can signal greater risk, as it may indicate that you need a lot of credit quickly. This component accounts for 10% of your score.
Important Note: Your income is not included in your credit score. While income and debt-to-income ratio are important factors for lenders, they are not part of the FICO Score calculation. Lenders consider these factors in addition to your credit score when making lending decisions.
How to Improve Your Credit Score
Improving your credit score takes time, but by following these simple rules, you can see gradual and significant improvements:
Make Payments on Time
The most crucial factor for your credit score is making timely payments. Even if you've missed payments in the past, all is not lost. Late payments stay on your credit report for several years but have less impact over time.
Pay Down Your Debt
Paying off debt will improve your score, but prioritizing credit card debt can boost your score more quickly. Keeping low or no balances on credit cards increases your "capacity," which adds points to your score.
Keep Credit Cards Open
When you pay off credit cards, resist the urge to close them. Keeping these cards open with no balance increases your capacity and adds points to your score. This requires discipline to avoid building the balance back up.
Avoid Applying for Excessive New Credit
Applying for many new loans or credit cards in a short period can hurt your score. While it's beneficial to show some experience repaying loans, too many new applications can indicate financial instability.
Dispute Inaccuracies on Your Credit Report
Errors on your credit report, such as incorrect late payments or unpaid balances, can negatively affect your score. Dispute inaccuracies directly with the credit bureau or the lender to correct these mistakes.
Credit problems don't have to last forever. By following these guidelines, anyone can improve their score over time. A higher score makes it easier to secure the best rates from lenders, making the effort worthwhile.
Take Charge of Your Financial Future
Understanding and managing your credit score is crucial for reaching your financial goals. Keep an eye on your credit, make improvements, and be proactive. By doing so, you can borrow more easily and save on interest. Improving your credit score takes time and effort, but it's worth it. Start today and take charge of your financial future.
