What’s in a Credit Score… And How to Manage Yours

Kyle Brice
Greater Nevada Credit Union

Credit Score is an ominous term. Advertisements for credit score websites are always trying to sell you something to fix it, while payday lender advertisements tell you it doesn’t matter because you’re already approved. If you’re in Generation X your credit score probably took a beating during the recession, and if you’re a millennial, like me, you probably have no idea what your credit score is, let alone what it should be.

Before you can figure out what your credit score is you should probably know what it means. Our partner BALANCE Financial Fitness defines it like this, “your score is a mathematical interpretation of risk assessment based your credit history.” Translated to English, this says, it’s a number which lets lenders know if they should give you money. The higher the number the better the chance you have. This number is not based on your income, employment, age, sex, or race; the only thing weighed on this score is past financial decisions.

It’s important to have a high credit score when looking for a loan or credit card. This is how lenders figure out the risk of lending you money and how much interest you will have to pay on that money. Your credit score can even affect your ability to rent a house, hence why my parents had to co-sign for my one room basement loft.

There are different companies which create credit scores. In American the three you may know of are Experian®, Equifax® and TransUnion®. Your credit score may differ with each one of these organizations, but they should all be in the same ballpark.  One of the most common scoring models is a FICO score, which is based on many factors. Five of these factors are important to know, and control: payment history, amounts owed, length of credit history, pursuit of new credit, and types of credit in use. Yes, these are listed in the order of their importance…pay your bills.

Here are steps you can take to improve and build your credit:

  • Obtain copies of your credit report from all three major credit reporting agencies to check for and correct errors.
  • Pay down your debt. If you can't pay the total balance each month, pay more than the minimum required payment.
  • Pay on time, Every Time (that includes student loans, millennials)
  • Avoid aggressively transferring balances to new cards.
  • Keep your credit card balances well under the maximum available limit.
  • Only apply for the credit you need.
  • Don't necessarily close cards you don't use. Length of credit history is something reporting agencies look at.
  • Repay collection accounts, judgments, and liens.

In General the most recent information is the most important - so the faster you take steps to improve your credit score the faster you can repair damage. Also, avoid "credit repair clinics," they can't do anything you can't do yourself for FREE.

If you have credit score issues, but have managed to build up a savings account you might want to use a deposit secured loan. These loans use your savings deposits or CDs as collateral for a lone. A deposit secured loan is a great way to build credit while keeping your savings intact. By using a deposit secured loan, you can receive the benefits from your savings account, and show a positive credit history at the same time.

Other Surprising Factors

Building responsible habits in all areas of your life will impact your ability to borrow. There are several behaviors that, while they are not necessarily reported to the credit bureaus, are contributing factors when lenders decide whether you are trustworthy. These behaviors include:

  • Paying your utilities on time
  • Maintaining steady employment
  • Responsibly using your checking account

Fixing your credit score may not be fun and it might take some time, but in the end you’ll be happy you did it. Another option would be to swear off the “system” and go live in a “hobbit hole” like this guy. But if I can leave you with any advice it’s this, be better than a “hobbit hole.”

12/19/2013