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Understanding & Improving Your Credit Score
Your credit score is one of the most fundamental aspects of your personal finances and the health of your financial standing. Yet, while most individuals understand its importance, few really understand the core points of what affects your credit score on an ongoing basis, and how to take the right steps to improve your credit score, both immediately and over the long haul.
As a local credit union, serving much like a community bank with additional benefits, we're committed to providing our members with as much information and security as possible. With this quick guide, you'll learn about both, helping you to get the New Year started off in a positive financial direction.
Your credit score really consists of 5 core components, in different ratios, giving more importance to some areas than others:
- Payment history with your credit cards and other debts, including on-time payments or delinquencies, with extra weight on current payment history, accounts for 35%
- Your total capacity accounts for 30%
- Length of your credit for 15%
- The accumulation of debt on credit cards or loans in the last year to 18 months, including number of inquiries and opening dates counts for 10%
- And finally, your credit mix, including factors such as the number of finance companies and credit cards you're working with, installments versus revolving plans and so forth, is the final 10%
Additionally, different time periods have a different weight or bearing on the end result. The current and previous 12 months accounts for 40% of your score; 30% gets allotted to 13-24 months prior; 20% to 25-36 months prior; and 10% for more than three years ago.
It's also important to know what doesn't affect your credit score, because people have misconceptions here as well. Primarily, neither your debt ratio, nor your current income, has a bearing on your credit score. Neither does your length of current residence or length of employment. However, these factors do come into play when you're being considered for a loan, so they shouldn't be completely ignored.
In terms of improving your credit score, the first step is to steer clear of the factors that immediately lower your score, including:
- Missing payments on credit cards, bills, loans, etc. Even small missed payments take 24 months to disappear from your credit score
- Filing for bankruptcy, which could immediately lower your score by up to 200 points
- Maxing out your credit cards
- Closing out your credit cards, which lowers your capacity. This is contrary to popular opinion. Many people try to ditch their credit cards and then stick only to using a debit card or cash, but that's not the best way to go. If you're done using a card and have it paid off, keep it open, just don't use it for new purchases, and you'll retain that beneficial capacity
- Excessive shopping for credit -- auto loans and mortgages excluded
- Opening up numerous trades in a short period of time
- Having more revolving loans vs. installment loans
- Borrowing from financing companies
From there, you can improve your credit score with these strategies:
- Making on-time payments
- Slowing down on opening new accounts
- Build up credit history over a period of years
- Move revolving debts to installment debts
Finally, here's a quick cheat sheet for your credit score:
A credit score of 700+ is virtually impossible if you have any current delinquency, and/or you don't have good capacity, but you'll virtually always have that score with those two things, and with no recent past delinquencies.
A credit score in the 600s means you are either doing well with how you pay and are just OK in capacity, or vice-versa.
A credit score in the 500s or lower means you have current delinquencies and potentially no capacity.
Keeping all these things in mind will help you to better understand and improve your credit score. If more information would help, a BFG Federal Credit Union representative is always ready to help. Call toll-free 800-306-4400 or visit www.bfgfcu.org.