March is National Credit Education Month
In March we celebrate National Credit Education Month – a complex financial topic such as personal credit may take a longer than a month to master, but understanding the basics is a great place to start!
What is a Credit Bureau?
In the U.S., there are three primary credit bureaus – sometimes called a credit reporting agency (CRAs) – which collect and maintain consumer credit information. The three credit bureaus are Equifax, Experian, and TransUnion. Credit bureaus produce credit reports which may be accessed by lenders, landlords, employers, etc. with your express permission. While there are other smaller credit reporting agencies, creditors and lenders are most likely to check your credit with one of the major CRAs.
The credit bureaus regularly receive credit-related information from the companies and lenders that you do business with, such as whether you’re paying your bills on time, whether you’ve defaulted entirely, and how much debt you owe them. CRAs also pull relevant public records, like tax liens or bankruptcy information, from state and local courts, which can be included in your credit report as well.
Your information and credit score may differ by credit bureau. Your creditors might not report to all three major CRAs, and the credit agencies don’t share your account information with each other. Different credit bureaus may use different scoring models, leading to different scores, which is why it’s important to check all three of your credit reports each year to ensure that everything is correct.
You have the right to access your credit report from each of the major CRAs once per year. Visit AnnualCreditReport.com or call 877-322-8228 to make the request. You may also purchase credit reports directly from the bureau, although Equifax and Experian offer credit reports that include some information from the three major CRAs in a single document.
Components of Your Credit Score
Behind the number itself (credit scores typically range from 300-850), there are five primary factors used to calculate your credit score. Lenders use your credit score to figure out how likely you are to pay back your debt (and on time) – many times those scores are the deciding factor in whether you will get a new loan or not.
The top five credit score factors are payment history, credit utilization ratio, credit history length, new credit, and credit mix.
- Payment history – the single most impactful factor used to calculate your credit score, having even one late or missed payment can have a negative impact.
- Credit utilization ratio – this is a fancy way of saying the amounts you owe compared to the amount of credit you have available to you. It is the next most impactful factor in your credit score. Using 30% or less of your available credit is ideal for maintaining a good score.
- Credit history length – how long you’ve held credit accounts makes up about 15% of your credit score. This includes the age of your oldest and newest credit accounts, and the average age of all of your accounts. Generally speaking, the longer you’ve been using credit, the higher your credit score.
- Credit mix – credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage your credit accounts. There are two types of credit accounts – installment credit (such as student loans, personal loans, auto loans, or mortgage loans) and revolving credit (like credit cards, lines of credit, or retail cards).
- New credit – though the impact is the smallest, the number of credit accounts you’ve recently opened, as well as the number of “hard inquiries” lenders make when you apply for credit is included in your credit score.
Things That Can Hurt Your Credit Score
Now that you know the general components of your credit score, here are some actions that can decrease your score:
- Making late payments or missing payments
- Defaulting on accounts or having your debt foreclosed on, repossessed, charged off, or settled in court through bankruptcy
- Applying for a lot of credit in a short time
- Using too much available credit (more than 30%)
- Closing a credit account
How to Improve Your Credit Score
Making improvements to your credit score can be easy once you understand why your score is struggling. It will take time and some work, but developing the habits below will help your score grow:
- Obtain a free copy of your credit report to ensure that there are no inaccuracies bringing down your score. File a dispute for items that you find are incorrect, and once they are resolved you should see an improvement.
- Pay your bills on time. Because it is the most impactful component to your score, paying all of your bills on time is critical to improving your score. It can take up to seven years for reports of late and missed payments to fall off of your credit report, which means the impact on your score will lessen with time, but linger for many years.
- Make any outstanding payments. If you have payments that are past due, bringing them up to date may save your score from taking an even bigger hit because the more time that has elapsed, the larger the negative impact on your score.
- Pay down debt. Reducing your revolving credit balances is a great way to lower your credit utilization ratio, and can be one of the quickest ways to see a credit score boost.
- Limit new credit requests. Hard inquiries stay on your credit report for two years, though their impact on your score fades over time.
I’m a New Borrower and Don’t Have a Credit Score
There are a couple of options to establish and build your credit profile. If you don’t have a credit score, you could become an authorized user on a credit card with someone close to you that you trust. As the primary cardholder makes all their payments on time, your score will benefit.
Getting a secured credit card can be used the same way as a conventional credit card – the only difference is that a security deposit (typically equal to your credit limit) is required when you open the account. The security deposit guarantees the credit issuer will get paid if you default on your payments, making them more comfortable on taking a risk on someone with no credit score, or proven history or managing credit.
Lastly, there are many creditors that will lend to first-time borrowers, so you may inquire about programs specifically designed for people with no credit score. You may pay a higher interest rate until you establish a credit history, but it is possible to access credit with no credit score.
If you still have questions about credit, don’t hesitate to reach out to your credit union! All of our staff are certified financial coaches, and we enjoy helping members understand how to make credit work for them. Contact us through online banking, by visiting a branch, or by phone toll free at 866-653-4392.