by Chelsea Springli 
Having a good credit score can help you with almost all of life’s major decisions like buying a car, buying a house, getting a new job, and more. Good credit can also help you save money on insurance, utilities, and even cell phone services. But establishing and maintaining a good line of credit is not always easy and it is important to understand what it takes to build strong credit. When I got my first credit card, all I knew is that I needed to make my minimum payments on time. I knew that if I didn’t, my credit score would drop. I didn’t understand why it mattered. Here is what I wish I knew as a first-time credit user.
Introduction to Credit
Let’s start at the beginning. Credit is your ability to borrow money and make purchases under an agreement that requires you to pay back the entire amount at a particular time. Usually, an interest charge called an annual percentage rate, or APR, is tacked onto the loan, meaning you have to pay back more than the amount that you borrowed. This compensates your lender for giving you the money.
There are two important aspects to credit: credit reports and credit scores.
Credit Report
A credit report is a detailed summary of your personal credit history. When you apply for a loan or a credit card, the lender will most likely run a credit report on you from either Experian, Equifax, or TransUnion. Credit reports include the dates that accounts were opened, loan amounts, current balances, and payment history, including delinquent payments or defaults. Your overall credit score will be part of the credit report.
Credit Score
There are five different factors that go into calculating a credit score, which ranges from 300 for borrowers with bad credit to 850 for borrowers with pristine credit. These factors include:
- Your payment history makes up 35% of your credit score.
- How much total debt you have makes up 30% of your credit score.
- How long you’ve had credit makes up 15% of your credit score.
- How much new credit you have makes up 10% of your credit score.
- What types of credit you have used (do you have a good mix of types of loans in your history?) makes up 10% of your credit score.
Note: Your score can decrease by the number of credit inquiries, so think twice about impulsively opening a store credit card just to get that 10-15% discount. Credit inquiries count against you!
Higher credit scores enable you to get a larger line of credit and get loans with lower interest rates.
Credit Monitoring
Keeping tabs on what is in your credit report ensures that your credit history is accurate and that nothing has been tampered with without your knowledge. A good rule of thumb is to pull your credit report for free from one of the three bureaus mentioned to make sure nothing is out of the norm. We’d be happy to help you with this at the credit union. If there are mistakes on your credit report, you can dispute the inaccurate information. It may still take several months for the issue to be resolved. It’s a good idea to time your free credit report a few months before you plan to apply for a loan. This gives you time to correct any inaccuracies or improve your credit score in the meantime.
Your Credit Summary
The big lessons here are to stay on top of the details of your credit report, prove you’re a good borrower by making your payments on time, every time, and keep your credit card balances low (typically less than 30% of your total credit card line), and make sure you monitor your credit regularly for any unusual activity. Since so many factors impact your credit score, being proactive in maintaining your healthy credit score will keep you in control of your finances.
Remember, if you ever need any help Alltru Credit Union is here for you.
