6 Essential Credit FAQs Answered
Building and maintaining an excellent credit score should be a top financial priority for every adult. Your credit score plays a significant role in how much interest you pay on loans and your chances for approval, and it can even impact whether you are approved to rent an apartment or get hired for specific jobs.
However, the world of credit reports and scores can be confusing and overwhelming. Fortunately, we're here to help answer some of the more common questions about credit to ensure you’re on the right path to locking in an exceptional score.
#1: What is a Credit Score?
Your credit score is a metric used by lenders to indicate your creditworthiness. This three-digit number reflects the likelihood that you will repay your financial obligations responsibly. Credit scores typically range between 300 and 850.
A lower score indicates you’ve had some financial hiccups in your past and might be a risk to lenders. A higher score demonstrates that you can handle credit responsibly and repay your debts on time – traits that improve your likelihood of being approved for future loans or credit.
Some free apps and websites allow you to check your credit without affecting your score. For a free copy of your credit report, visit www.AnnualCreditReport.com.
#2: What is a Credit Report?
While most people focus on their credit score, your credit report is just as important. Your credit report is a detailed summary of your credit history, including current and past credit cards and loans, account status, repayment history, and any negative marks
Lenders review your credit report to understand your habits regarding repaying loans and managing credit. They can also see outstanding balances to determine if you’re financially able to take on more debt.
You can obtain a free copy of your credit report at www.AnnualCreditReport.com. We recommend you review your report periodically to ensure no errors or fraud are present.
#3: How is My Credit Score Determined?
Your credit score is calculated based on a formula developed by credit reporting agencies. Two of the most popular methods are the FICO® Score and VantageScore. While each calculation varies slightly, they have similar characteristics. For example, FICO® Scores are calculated using five main categories:
- Payment History (35%): Whether you pay your accounts consistently and on time.
- Credit Utilization (30%): The amount you owe compared to your credit limit.
- Length of Credit History (15%): The time you've had credit established.
- Credit Mix (10%): The types of credit accounts you have (e.g., credit cards, auto loans, mortgages).
- New Credit (10%): If you've recently opened new credit accounts.
#4: What is a Good Credit Score?
Most credit scoring models range from 300 to 850, with scores ranked as poor, fair, good, very good, and excellent, depending on where they fall on the scale. A good score typically falls between the high 600s and the low 700s. A score in the mid-to-high 700s is considered very good, and anything exceeding 800 is considered excellent.
If your score is in the mid-600s or below, you should improve your credit before applying for a new loan or credit card.
#5: How Do I Start Building Credit?
Knowing where to begin can be overwhelming if you're new to credit. It's important to understand that only some credit products are created equal, and you want to start with something easy to manage.
There are credit products designed specifically for those just beginning their credit journey. These options can help you build a positive credit history without much risk of mistakes or negative marks on your credit report.
- A credit builder loan is just what it sounds like – a loan designed to help those with little or no credit history build their credit. These loans can vary in format by institution but operate similarly. The lender secures or holds a set amount of your money for a term, usually between six and twelve months. Then, with each monthly payment, those funds are released to you. The lender reports every on-time payment to the credit bureaus, helping you to build your credit score.
- A secured credit card is another excellent option to help you build credit. It functions like a traditional credit card; however, you put a deposit down with the lender – for example, $500. Then, you use the card as normal. If you cannot repay your balance, the lender uses your deposit to cover the balance – that way, no negative marks are reported to the credit bureaus as you learn to manage credit.
- Become an authorized user on someone else’s credit card with good credit. You can use their credit card in your name, but they are still the primary account holder responsible for making payments. While this measure won't have the same impact as building up your credit history, it can still be a beneficial tactic to help boost your credit when you are just starting to build your score. This method is commonly shared between parents and young adult children.
#6: How Can I Improve My Credit?
Improving your credit score requires patience and discipline, but the benefits will be worth it. Here are some essential steps to take to see a positive change in your credit:
- Pay on time: Making consistent, on-time payments is the best place to start your journey to better credit. Set up automatic payments to ensure you get all the due dates and avoid late fees.
- Keep your balances low: Low overall credit utilization is critical. Financial experts recommend keeping your credit usage under 30% of your available credit limits. For example, if your credit card has a credit limit of $1,000, you should keep your balance below $300. If your balances are higher, commit to paying them down by creating a manageable repayment plan.
- Review your credit report: Regularly check it for errors and fraud - and dispute them immediately if you see any. Removing incorrect information from your report can significantly increase your credit.
We Can Help!
An exceptional credit score can unlock a slew of financial perks. Knowing you’ll be approved for a loan, when necessary, provides peace of mind, and an excellent score can significantly reduce the amount of interest you pay. While building or improving your score takes time, it’s well worth the investment.
If you want to learn more about how a credit builder loan or unsecured credit card can improve your score, we’re prepared to help. Please stop by any of our convenient Service Center locations, call 800-367-6440, or make an appointment online.
By Campus USA at 17 Feb 2024, 08:00 AM