Blog

It turns out – what you don’t know can hurt you.

Especially if that thing you don’t know…is your credit score.

We want our clients to feel confident in their finances – and confidence begins with knowledge.

What is a credit score? 

Your credit score is a three digit number that demonstrates your history of managing credit products. Do you make your payments on time? Are you maxing out your credit card? Have you applied for a lot of credit products in a short period of time?

Your credit score helps lenders and others understand how likely you are to make good on your commitments when you sign a loan document.

Why does my credit score matter?

Your credit score impacts a lot of things in your life. Like what?

• Your ability to get a loan when you need one.

  • Your score shows lenders whether you’re responsible with financial commitments and whether you are likely to repay a loan. The higher your score, the better you look to a lender.

• Your interest rate on loans.

  • Lenders often use what is called a risk-based model for determining a) whether or not they will make a loan to you, and b) what kind of interest rate you will get. A lower score means a higher interest rate, and that can cost you a pretty penny over time. A good score, on the other hand, can mean a lower interest rate, leading to significant cost-savings over the life of a loan.

• Your ability to rent an apartment or house.

  • If your credit score shows a history of late payments or a lot of debt, you may be a risky bet for a landlord who is hoping to rent to someone who they can trust to make on-time payments consistently.

• Your ability to get certain jobs.

  • Some jobs will check your credit to get a feel for how trustworthy you are, as well as to determine if you are in some financial difficulty that may make you a risk for theft or fraud. Does a low credit score automatically mean you are untrustworthy or likely to steal? Certainly not – but it is sometimes a risk an employer is unwilling to take.

What components make up my credit score?

There are several components that make up your credit score. Some are more important than others as they make up a higher percentage of your score, but it’s a good idea to have a solid understanding of all of them.

• Your payment history takes into account how often you make your payments on time.

  • This is the most important element that impacts your credit score. Late payments can have a big impact on your score, so be sure to make payments on time – or at the very least, within the grace period. Bankruptcies, foreclosures, liens, and any other collections on your record are more serious and have a larger impact on your score.

• Your credit usage is another important factor in determining your score.

  • It takes into account what percentage of money you have spent on credit cards or other accounts that have credit limits. It is recommended that you keep your credit usage under 30% - in other words, if you have a card or other line of credit with a limit of $1,000, you should keep your balance below $300. 

• Your credit age indicates how old your average account is.

  • In general, the older your average account, the better. This factor is important because it shows that you are able to maintain healthy credit relationships over a long period of time.

• Your total balances show what your balance is across all of your credit accounts.

  • From credit cards and auto loans to mortgages and student loans, this takes all of your accounts into consideration. It also takes into account whether you have different types of debt – installment (loans with fixed, scheduled payments) and revolving (loans that are renewed as debt is paid off, so you can access a line of credit when needed). Having both types typically helps your credit score.

• Your recent credit shows how many recently opened credit accounts you have.

  • While just a small part of your score, this indicates whether you have recently applied for or obtained new credit. This part of your score only takes into consideration hard pulls on your credit. A hard pull happens when you apply for a loan and the lender reviews your credit report to make a decision. A soft pull is when you check your own credit or when a lender checks your credit for the purposes of a preapproval. A soft pull will not be considered as a part of your credit score.

How can I improve my score, or maintain a good score?

There are several things you can do to ensure a good score. Consider the components of your credit score we just went over – each of these components can help us find ways to ensure a good credit score.

• Payment History

  • If you have any past due accounts, bring them current by making payments.
  • Limit the number of credit cards you use – the fewer you use, the less there is to track, and the less likely you are to accidentally miss a payment.
  • Use auto-pay to make payments on installment loans so you don’t have to remember to make the payments manually each month.

• Credit Usage

  • Reduce your spending and increase your payments on your credit cards.
  • It may seem counterintuitive, but keep unused cards open.
  • Pay off debt rather than moving it from one credit card or loan to another.

• Credit Age

  • Avoid opening many accounts too quickly.
  • Keep your oldest account open.
  • Keep unused cards open (see – this one helps with multiple aspects of your score!).
  • Don’t stress if you’re new to credit. This aspect of your score will improve over time.

• Total Balances

  • Try to have a diverse mix of credit accounts – having a mix of both installment loans and revolving accounts helps.
  • Only take out loans when you need them.

• Recent Credit

  • Shopping around for a home or auto loan? Apply within a short period of time so the inquiries will all be counted as a single hard pull rather than as multiple.
  • Avoid opening a lot of accounts in a short window of time if possible.

How can I learn my credit score?

Now that you understand what your score is, why it’s important, and how to improve it, you probably want to learn what your score is.

There are a number of methods you can use:

• The website www.annualcreditreport.com is a great way to get your credit report.

  • While this website will not provide the actual score itself for free (it may ask for payment for the actual score), it will provide the report that makes up the score. It will include all of your debts and where they stand. You can get this report for free once a year – use it to ensure that you recognize all of the accounts and activity. See something you don’t recognize? It’s possible someone may be using your information to open accounts. You may want to contact the creditor directly and consider placing a fraud alert on your credit report.

• You can also access your credit reports directly from each of the three credit bureaus – Experian, Equifax, and TransUnion.

  • You can also access each of these reports once per year, so if you stagger each report throughout the year, you can keep an eye on your report consistently.

• Your bank may offer a credit monitoring tool.

  • Here at Park Bank, for example, we offer a program called Credit Sense^SM that you can access directly from within Mobile and Online banking. You can see your score, get tips for how to improve it, and get exclusive offers that may help you lower your rates on existing credit products.

When it comes to credit, knowledge really is power. Take control of your financial health by keeping a close eye on your credit score, understanding what makes up your score, and taking action to keep it moving in the right direction.