In the ever-evolving landscape of personal finance, understanding your credit score is important for making informed financial decisions. Your credit score plays a significant role in determining your eligibility for loans, credit cards, and even apartment applications. Let's deep dive into how credit works and how you can best help your score.
What is a Credit Score?
At its core, a credit score is a numerical representation of your creditworthiness. It reflects your credit history and provides lenders with a quick snapshot of how likely you are to repay borrowed money. Credit scores typically range from 300 to 850, with higher scores indicating better creditworthiness.
Components of a Credit Score
Credit scoring models take various factors into account to calculate your credit score. The key components include:
- Payment History (35%): Timely payments on credit accounts, loans, and bills significantly impact your credit score. Make sure to pay your bills on time. Setting up autopay in Online & Mobile banking can help you make sure your payments are processed on time.
- Credit Utilization (30%): The ratio of your current credit card balances to your credit limits. Aim for a lower utilization rate for a positive impact on your score.
- Length of Credit History (15%): The average age of your credit accounts. The longer you’ve had credit available to you, the better. If you’re considering closing any accounts, don’t close the ones you’ve had open for a long time. It is better to close newer ones if possible. Here at Arbor, we offer Volt credit cards starting at the age of 16*. This can help your child start building their credit early and help them have a longer credit history when they need it.
- Credit Mix (10%): The types of credit accounts you have, including credit cards, mortgages, and installment loans. This also includes any credit recent inquiries into your credit history. Opening a new credit card account decreases the average age of your credit history and adds a new inquiry to your credit history, both of which can make your credit score dip slightly. If possible, try to keep the number of each to a minimum and space out any applications that will require a credit check.
- New Credit (10%): Recent credit inquiries and the number of recently opened accounts. Opening several new accounts in a short period can be seen as risky behavior.
How to monitor your credit
Regularly Check Your Credit Report
Stay vigilant by reviewing your credit report regularly. By law, you are entitled to a free annual credit report from each of the major credit bureaus—Equifax, Experian, and TransUnion. Check for inaccuracies, fraudulent activities, or discrepancies that could be affecting your score.
Utilize Credit Monitoring Services
Consider using credit monitoring services that provide real-time updates on changes to your credit report. These services can alert you to potential identity theft, unauthorized credit inquiries, or other activities that may impact your credit score.
Free Credit Check up
Here at Arbor, we offer our members one yearly, free credit check up. During this one-on-one a credit knowledgeable staff member will look closely at your credit report and help you make sure your goals and score is on track.
How to Improve Your Credit Score
If your credit score is not where you would like it, there are steps you can take to improve it:
- Pay your bills on time. If you have older late payments, they will begin to become less significant over time.
- Reduce credit card balances.
- Avoid opening multiple new accounts in a short period.
- Diversify your credit mix over time.
- Pay down any credit card balances and don’t max out your cards.
- Consolidate revolving debt when possible.
Understanding your credit score is Important. It empowers you to make informed financial decisions, access better interest rates, and build a solid financial foundation. By staying proactive, regularly monitoring your credit, and taking steps to improve your score, you can navigate the world of personal finance with confidence.
* Parent approval required. parent may need to be a cosigner on the card. Rates are variable. Qualification is based on an assessment of individual creditworthiness and our underwriting standard. All Credit Union loan programs, rates, terms and conditions are subject to change at any time without notice. Not all applicants will qualify. Contact us for more information. See full disclosure.
