By Sara Bristoll
A credit score can be a confusing thing and oftentimes brings up more questions than answers for consumers. Questions like: How often does it need to be checked? What goes in to the credit score? Do I really have any control over this seemingly-random number? Well, we’ve done some research and have some answers for you.
Let’s start with the easiest question to answer: How often does your score need to be checked? At minimum, experts recommend you check your score annually – which is how often the credit bureaus are required to give you your report for free. By regularly checking your credit report, you can monitor for mistakes or even if an account is opened up in your name that shouldn’t be.
If you’re not already a member of Arizona Federal, there are sites out there like CreditKarma.com that will give you this information without asking for your credit card. For Arizona Federal members, you can check both your report and score quarterly through IDProtect at no charge.
Now, on to the next two questions. What goes into a credit score and do I really have any control? Yes! You do have control over your number and we’re going to show you how. First, imagine your credit score is a full pie (yum!). To make a whole, delicious credit pie, you need your payment history, utilization ratio, length of credit opened, number of new credit accounts, and the types of credit you have. Shall we dive deeper?
- Your payment history makes up 35% of your credit score – that’s more than any other category! This is where making payments on time and making more than the minimum payment pays off, while late payments or paying less than the minimum will negatively impact your credit score.
- Utilization ratio sounds a lot scarier than it is and makes up 30% of your credit score. This is calculated by taking the sum of all of the balances (amount you owe) on your revolving debt (credit cards, store accounts, etc.) and dividing that by the total amount of open credit you have on those same accounts. For example, if someone has three credit cards with limits of $2,000, $3,000 and $5,000, and they owe $1,000 on each of the cards, that person would owe $3,000 total. Divide that by the $10,000 they have in open credit limits and you get a utilization ratio of 30%. Thirty percent is about the maximum experts recommend you keep your utilization ratio at. Anything higher and the credit bureaus will lower your score.
- The length of credit open covers how long you’ve had your credit accounts – including loans, credit cards, store cards, etc. If you’ve had a credit card since you were 18 and it has no annual fee, it may be worth it to keep the card open even if you don’t use it. The longer your credit history, the better your score. This category makes up 15% of your credit score.
- New credit accounts includes opening new accounts in your name, as well as the number of inquiries you’ve had recently. Don’t let someone run your credit until you’re ready to buy. Some dealerships or lenders will insist on running your credit upfront. If you’re not ready to make a deal, we recommend holding them off. This is 10% of your credit score.
- Types of credit used is the last 10% of your credit score. Yes, some types of credit are better than others. Mortgage loans and auto loans are great ways to build your credit score – as long as you pay them on-time – but they can be hard to get approved for if you have no credit or a bad credit history. Credit cards (regular and secured) can help you build your credit. Pay them on time for a positive impact on your credit score, and pay them off every month to avoid interest charges.
If you have any questions on your credit, sit down with a financial coach for a credit consultation! We’re happy to help our members understand their credit score and improve them.