by Emily Hechler 
Your credit score is a reflection of your financial history. While many people know that a high credit score is important, they don’t understand why it matters or how to improve their own. This guide will cover the essentials of a credit score, how it decreases, how you can increase it, and how you can practice healthy credit building habits to help you toward financial success.
Intro to Credit
Your credit score can have a major impact on your ability to get approved or a loan or credit card and can affect your interest rate. However, it’s just a snapshot of your full financial story. To understand why it is so impactful, you must know how your credit score is calculated.
Credit is your ability to borrow money under the agreement that you will pay back the entire amount in the future. When you apply and are approved for a loan, your term notes how long you will be paying off the balance. Other lending products like credit cards and lines of credit don’t have a payment plan. They simply require a minimum payment of a certain amount each month. Since you can keep adding money to your account, your balance won’t be settled until you stop using the available credit and pay back the remaining balance. However, you can use the product again as needed and start the cycle over.
There are three main components to credit – credit score, credit report, and credit monitoring.
Your credit score is a tool lenders use to scale how reliable of a borrower they expect you to be. Credit scores range from 300 to 850. A higher credit score is better than a lower credit score. Your credit score is calculated using five factors. Your payment history determines 35% of your credit score. The amount you currently owe on your loans and credit cards makes up 30% of your credit score. The length of your credit history determines 15% of your credit score. The amount of new credit you have determines 10% of your credit score. Finally, your variety of lending products determines 10% of your credit score.
Your credit score can be accessed through the three major credit bureaus in addition to your credit report. This report shows the detailed history of these five areas. This includes your minimum payments, your payment history, any late payments, how long these accounts have been opened and more. Since reading these reports in depth is time consuming, lenders trust that your credit score reflects your overall credit history that is found in the report.
Anyone with a history of loans or credit cards, even if it was just one, should monitor their credit. Experian, Equifax, and TransUnion are the three major credit bureaus where you can access your credit report. You are entitled to one free report each year. By monitoring your report, you can ensure that your report accurately reflects your history. If you notice a mistake, such as a false late payment or fraud, reach out to your financial institution and the credit bureaus to correct the mistake. These can negatively impact your credit score if not corrected.
Hard vs Soft Credit Checks
When anyone seeks to check your credit score, this is called a credit inquiry. These are also known as credit checks and credit pulls. Even though this information is personal, potential employers, lenders, insurance companies, and others can perform credit inquiries. Certain scenarios may result in your credit score being lowered by a few points. Here are the differences between hard credit inquiries and soft credit inquiries.
Hard credit inquiries affect your credit score. Hard credit inquiries are done when you apply for a lending product, such as a credit card or loan. Your future lender wants to know as much as they can about your financial history to determine how risky a borrower they deem you to be. If you have a lot of new accounts, late or missing payments, and a large debt to income ratio, and a low credit score, you are seen as more risky. This will likely result in difficulty getting approved for the product or receiving higher interest rates. This credit inquiry will lower your credit score by a few points, since it is assumed that you will be taking on more debt.
Soft credit inquiries do not impact your credit score. Soft inquiries occur when you pull your credit history from one of the major credit bureaus during your free inquiry each year. As previously mentioned, you are entitled to one free credit report each year from each reporting bureau. A soft credit inquiry also occurs when you apply for preapproval of a lending product. When you receive letters stating that you prequalify for an insurance discount, credit card, or other product, the company likely performed a soft credit inquiry.
If you are considering applying for a new lending product, this can be a great time to access your free annual soft credit inquiry. If your credit score is low, you have a high debt-to-income ratio, or have a history of late payments, take some time to improve your credit before applying for the product. These scenarios have likely decreased your credit score over time. You need time to increase your credit score to get a batter interest rate. Then, when you apply in a few months with a higher credit score, the damage from the upcoming credit check will be minimized.
Products to Raise Your Credit Score
A high credit score comes with many benefits. Having a well-rounded and diverse financial history can help you in the future. Whether you need more for an unexpected situation or an expensive, long-term project, a high credit score works in your favor for getting accessible products with great rates. In addition, paying these loans back raises your credit score too. Here are four different products to help.
Wisely use your credit card. Instead of using your credit card for the majority of your purchases, keep it open for emergencies. This allows you to pay for the situation without scrambling to make ends meet. It’s still ok to use your credit card throughout the month as long as you pay off your balance in full when you receive your bill. Keep your credit utilization under 30% to make this work best.
Borrow a Personal loan. A Personal loan is ideal for getting a large amount of money quickly. Personal loans don’t require collateral, so the application and approval process with fast. Since there’s no collateral, you may have to pay high interest rates, even if you have a good credit score. However, by making your loan payments on time each month, you’ll raise your credit score!
Use the equity of your home. Your home equity is the amount of money you have paid toward the principal of your mortgage plus your down payment. With a Home Equity loan, you borrow against the equity of your home. Essentially, your home is used as collateral to get you a lower interest rate. Many people use Home Equity loans to fund home improvement projects to increase their equity even more.
Borrow with a HELOC. A Home Equity Line or Credit, or HELOC, also borrows against the equity of your home. The difference is that a HELOC works more like a credit card. Each month, you pay for what you borrow. HELOCs are great for ongoing home projects, since you’ll likely purchase supplies or pay professionals over time. You don’t have to use a HELOC for home projects, but that is the primary purpose of the product.
Tips to Improve Credit Score
A healthy credit score opens many doors. Plus, it can lower your monthly payments on other products too. In the case where your credit score decreases by a few points, you won’t feel the damage as much if you start with a high credit score. Here are five tips for improving your credit score and keeping it high.
A high credit score provides financial security. Before you apply for the lending products just mentioned, you can improve your credit score in other ways. By improving your credit score before you need to, you can stress less about not being approved for a product in the future. At Alltru, we understand that life situations may cause your credit score to decrease. That’s why we provide accessible banking products to our community that needs them the most.
Get started now. If you have no credit score, you’ll be seen as a risky asset, just like if you had a low credit score. No credit score means that you don’t have any documentable lending experience. A low risk way to start building your credit is to use a Credit Builder Loan or a Secured Credit Card. Just make sure you budget to pay back the money each month so you can watch your credit score rise.
Use the right credit card. The average American has four credit cards. While credit cards come with many perks, carefully select which option is the best for you. Compare the benefits, fees, and interest rates from different financial institutions and stores. A great, standard option is the Rewards Visa Credit Card from Alltru. When you use this card, you earn points for every dollar you spend. Later, you can redeem your points for merchandise, discounts, or cashback.
Check your credit history. Don’t forget to use your free annual credit inquiry. Even if you don’t plan to open a new loan or credit card soon, you should still monitor your credit regularly. This can help you catch mistakes or fraud without having to pay for the consequences. Mistakes and fraud can take months to correct. Be proactive now so you avoid the stress of high interest rates or denial of a product later.
Meet your payment deadlines. Making your payments on time is an effective way to raise your credit score. Since many lenders require monthly payments, you have several opportunities to meet your payment deadlines throughout the year. To make the process simple, set up automatic payments with mobile and online banking. This can help ensure that you won’t have a late payment just because you forgot about the bill.
Pay off your debt. Eliminating your debt can take years to pay off. Large loans, like mortgages, usually take close to the full term to pay off. Other loans with short or no specific terms, such as credit cards, can be paid off faster with more than the minimum payments. If you maintain a low credit utilization, your credit score will start to rise.
Credit Score Tips
As you start to build your credit score, it’s important that you accurately understand some misconceptions about the process. Here are some key tips about your credit to keep in mind.
Paying off debt doesn’t instantly remove it from your report. Your credit report shows your past seven to ten years of history. This includes timely and missed payments, account duration, variety of products, and more. When you pay off your debt, even early, it will still be documented in your credit history. However, your credit utilization and debt-to-income will immediately and positively change.
You and your spouse can have different credit scores. Since your credit report notes up to 10 years of history, your credit score is likely different than your spouse’s credit score. Even if you’ve been married for over a decade, whose name is the primary owner on your accounts. Before you apply for a new joint account, check both of your credit scores. These can greatly effect your interest rates.
Your credit score is likely not the same across all three major credit bureaus. Not all your accounts and lenders will report to all three major credit bureaus. Plus, the credit bureaus may update their data on different days. Even though discrepancies likely exist in your credit reports, all lenders will use your score as a key indicator of your financial history.
Only use reliable credit score resources. Alltru’s Blog and Learning Center have several articles to help you learn about how to effectively manage your finances – and ultimately credit score. The more you know about the topics, the more equipped you are to make the best financial decision for your situation. In addition to our website, the resources from Experian, Equifax, and TransUnion are credible.
Types of Credit Cards
As we previously mentioned, using the right credit card is essential for building your credit score. With so many options, it may be difficult to choose the best one. Here are the five major types of credit cards you can choose from.
Rewards Credit Card – A rewards credit card offers exclusive perks that are only available for cardholders. Many financial institutions promote rewards credit cards with various benefits, so no two are the same. If you want a credit card to use for your everyday purchases, the Alltru Rewards Visa Credit Card is a great option. Cardholders earn points for every dollar spent and enjoy no annual fees. You can cash in your rewards for merchandise, discounts, gift cards, and cash back. If you already have a credit card and want to switch to this option, we offer low introductory rates for balance transfers.
Low Rate Credit Card – Low rate credit cards are the ideal choice if you tend to carry a balance over to the next month. One downside of credit cards is that they typically use high interest rates if you don’t pay your balance in full each month. A low rate credit card like Alltru’s Low Rate Visa is a great way to keep your interest fees low. Plus, take advantage of no annual fees and a low introductory rate for balance transfers.
Secured Credit Card – If your credit score has been damaged over time, a secured credit card is a great way to get an accessible credit card. The funds in your Checking or Savings account secure the credit line of your card. Plus, your interest rate can be lower too. If you have a low credit score, Alltru’s Blue Secure Visa may be the right card for you.
Store Credit Card – Financial institutions aren’t the only organizations to offer credit cards. Many retailers offer store credit cards too. These cards typically offer bonus savings or discounts for purchases made from the retailer. However, these cards are known to come with high interest rates. Before you apply for a store credit card, be sure to read the fine print so you know whether the benefits are worth the cost.
Charge Credit Card – Charge credit cards are typically only available to individuals with high credit scores and incomes. These cards are unique because they don’t have a spending limit. However, you can’t carry a balance over to the next month either. If you try, you’ll face a high fee. These cards are risky, so they should only be used if you have a track record of paying your credit card bill in full each month.
Benefits of Credit Cards
Credit cards are great tools to have. However, it can be easy to put yourself in significant credit card debt if you aren’t careful. When you use a credit card wisely, you can take advantage of the perks they offer. Here are some ways you can benefit from using a credit card.
Credit cards can help you raise your credit score. Since your credit score can impact your ability to get approved for a loan or to get low rates, it’s important to keep your credit score high. By using your credit card regularly and paying your minimum payment on time each month, you can raise your credit score. Just be careful not to make purchases simply for the sake of using your credit card. Credit card usage can become unhelpful if not used strategically and intentionally.
Credit cards can be rewarding. Rewards credit cards allow you to earn real rewards just for using your credit card. If you carefully follow your budget, you can redeem your points for gift cards or cashback to help ease your spending limit. Points and rewards often expire after a few months, so make sure you cash in your earnings so you don’t miss out on the benefits.
Credit cards are ideal for emergencies. Most of us don’t have as much money saved for an emergency fund as we should. That’s where a credit card comes in handy. When unexpected situations arise, you can use your credit card to pay for the emergency up front. That way, you can focus on getting the care and resources you need when you need them. The card balance will be there for you to pay back later.
Credit Card Red Flags
Credit cards can be valuable financial tools when used wisely, but it can take years to recover from mistakes. A damaged credit score takes time to repair. Even experienced users can fall into these traps. This list contains red flags that you should be mindful of to avoid damaging your credit.
Not knowing the common pitfalls of credit cards can cause a lot of harm. Mistakes can lower your credit score or leave you in a pile of credit card debt that will take months or even years to escape. Unfortunately, experienced credit card users can still become the victim of these mistakes. Whether you’re applying for your first or fifth credit card, here are common credit card mistakes to avoid.
Maxing out your card – Maxing out your credit card each month can hurt your credit score, even if you make your minimum payments on time. This is because your credit utilization impacts your credit score. Smart users keep their credit utilization below 30%, meaning they only use up to 30% of their available credit. For example, with a $10,000 credit limit, aim to keep your balance under $3,000.
Missing credit card payments – Missing credit card payments can greatly impact your credit score since your payment history makes up 35% of your score. Late, missed, or partial payments can quickly lower your score. Plus, your provider may raise your interest rates and charge you late fees too.
Cancelling your card – It might seem tempting to cancel your credit card climbing out of a history of credit card debt. However, cancelling your card can lower your credit score. Part of your score is determined by your available credit and the length of your credit history, so keeping the card open helps maintain a healthy credit utilization ratio. You don’t have to use your credit card even if you keep it open. You can keep it for emergencies.
Retailer Card Help
Store credit cards offer exclusive perks from your favorite retailers. Even though it may be easy to apply and get approval, this makes it easier to fall into unnecessary credit card debt from impulsive purchases. Here are some helpful tips to consider before applying for a store credit card.
Will you use the card regularly? Store credit cards are attractive because of the points systems, discounts, and other rewards they offer. Consider how often you shop from the retailer and how much money you spend on average a month. If you only shop at the store twice a month and spend around $50 each time, it may take years before you’ll earn meaningful rewards. In the meantime, your points may expire before you can use them. Read the details of the perks to determine if the card will give you any more benefit than your existing credit cards.
Will you feel the earn and burn? “Earn and burn” refers to when you earn the points for making purchases and then feel the burn of the high interest rates and credit card debt. Store credit cards with tempting benefits can lead to overspending just to rack up points. You end up paying high interest on unnecessary purchases. Before applying for a store card, think carefully about your ability to stick to a budget so you won’t be the next earn and burn victim.
Are the perks worth the hassle? Some card perks are harder to earn than they seem. It may take years to collect enough points for only a few dollars. Plus, your points may expire before you can use them. Check what purchases earn rewards and how long they last. If you can’t earn points quickly enough for a significant reward, the card may not be worth it.
Credit Cards for Monthly Bills?
Credit cards can be convenient options to pay your bills, especially if you are waiting for your next paycheck to make ends meet. But are they always the best option? Here are some details to consider when paying with a credit card. Keep these in mind during your next payment to decide whether to use a credit card, debit card, or have funds directly withdrawn from your checking account.
Build your credit quickly. Many people have electricity, gas, an auto loan, mortgage, and other bills to pay each month. When you use a credit card for some of these, you can quickly start to improve your credit. This will only work if you pay your minimum amount on time each month.
Set up automatic monthly payments. Many payment processors allow you to set up your credit card for automatic payments. Your payment will be processed almost instantly and usually post within a couple of business days. This way, your payments shouldn’t be late, as long as you have enough credit available on your card.
Monitor your credit utilization. If you use your credit card to pay for your bills, you’ll have less room to use your card for other purchases. In addition, high credit utilization leads to a lower credit score. To determine if you should charge a bill to your credit card, calculate your credit utilization first to avoid damaging your credit score.
Watch out for extra fees. Some service providers charge extra fees for using a credit card for paying your bill. Before setting up your automatic payments, read the details of your payment options. You may be better using a debit card or having the funds pulled directly from your Checking account if this is the case.
Be mindful of interest rates. When you don’t pay your entire credit card balance in full, you will be charged interest on the remaining balance the next month. If you are using your credit card to pay for bills because you are waiting for your next paycheck to come in, create a budget. This will help you pay off your credit card balance and stop paying more than necessary for your bills because of high interest rates.
When to Start Building Credit
Building good credit is key to reaching important financial goals, like buying a home or car. It can even impact job opportunities, renting an apartment, and insurance rates.
A solid credit score not only helps you get approved for loans but also affects the interest rates you pay for them. Maintaining a good credit score can save you tens of thousands of dollars over your lifetime. But when should you start building credit, and how?
We recommend starting to build credit at age 18. Before this age, you cannot legally take on debt. Credit activity before 18 can trigger fraud alerts, as identity theft of minors is common. It’s also a great time to sign up for credit monitoring to watch for errors or fraud.
A credit card is a great way to build credit. Begin with a low-rate card and keep a low credit utilization. Use it for small purchases like gas or groceries and pay off the full balance each month. This helps you build credit without falling into debt. In addition, making payments on your student loans helps you build credit too.
The key to good credit is simple: avoid taking on more debt than you can handle, pay on time, keep balances low, and pay them off regularly. With good credit, you’ll have the freedom to make big purchases with low interest rates later.
Credit for Young Adults
If you’re in your twenties and haven’t intentionally started building your credit yet, you’ve likely already taken some steps without realizing it. Many student loans are deferred, meaning you don’t make payments until after graduation. Once you begin repaying these loans, you’ll start building your credit. However, if you didn’t go to college, graduated without loans, or want to take more control of your financial future, here are some credit tips.
Use credit wisely. Credit cards can be helpful tools but overusing them can lead to hard-to-break habits. Keep your credit utilization low to make your monthly payments more manageable. You might even be able to pay off your full balance each month and avoid interest fees. A great option for first-time cardholders is our Low-Rate Visa.
Don’t rush into applications. Applying for too many credit products can lower your credit score, which can be risky when you don’t have a long and strong credit history. Only apply for products you’re serious about, since each application involves a hard credit check. If you apply and get approved, you can build your credit score by making your minimum payments on time
Raise your credit score. A good credit score opens doors in the future, and building one takes time. Start by making on-time minimum payments on bills like student loans, credit cards, and auto loans. Missing payments will hurt your score. Consistency is key to making a positive impact.
Invest in your financial future. You don’t need a large income to start investing. Investing your money is small amounts now can pay off in the long run as your savings grow. Consider options like a Certificate of Deposit (CD) or an IRA account—both offer long-term benefits and require commitment. The diversity of your accounts impacts your credit score too.
Don’t spend everything you earn. Even if investing isn’t right for you yet, try to save a portion of your income. Living paycheck to paycheck can lead to financial stress and reliance on payday loans. Using budgeting tools can help you save for emergencies, education, or a new car. The longer you stick to your budget, the easier it becomes.
Building Credit for Beginners
Building credit can be challenging. Damaging your credit is significantly easier. If you don’t know where to start with building your credit, check out these accessible options from Alltru. These tips for beginners can help you start to build credit.
Pay off your student loan debt. Paying off student loans takes time, especially since many lenders don’t require payments until after graduation. Making the minimum monthly payment on time will help build your credit. Paying more than the minimum will help you pay off your debt faster.
Pay with a credit card. Credit cards are a convenient way to make every day or large purchases, and they can help in emergencies. By using a credit card for small purchases and paying off the balance in full each month, you avoid interest fees while building your credit.
Become an authorized user. If you’re not ready for your own credit card, consider becoming an authorized user on a loved one’s card. Keep track of your purchases and repay them each month. Remember, late payments or missed payments will hurt both your credit score and the primary user’s score. It’s key to make sure these payments are settled so you don’t damage your credit score instead.
Use a Credit Builder loan. A Credit Builder loan is an affordable and accessible option to build credit. Your monthly payments go into a Savings account at Alltru. At the end of the loan term, you get access to the Savings account with the funds you paid. If you make all your payments on time, we’ll refund half of your interest fees. This short-term commitment can have long-term benefits for your credit.
Repair a Low Credit Score
Rebuilding your credit score takes time and effort. However, we have the resources and tips you need to start. The sooner you start taking steps to improve your credit, the sooner you can start to benefit from the perks of having a high credit score.
Pay your bills on time. Making timely payments is one of the most effective ways to improve your credit score. Missing and late payments can harm your credit score over time. To make sure you pay on time, consider setting up automatic bill payments through online or mobile banking.
Monitor your credit utilization. Your credit card limit can vary based on several factors. Those with excellent credit scores typically use only about 30% of their available credit each month. High credit utilization can negatively impact your credit score. This is true even though others in a similar financial situation may have a different credit card limit. Additionally, keeping smaller balances is easier to manage and pay off.
Avoid opening too many accounts. Each time you apply for a credit card or loan, the lender performs a hard inquiry. This credit check will slightly lower your credit score. To minimize the impact, only apply for accounts that you truly need.
Pay more than the minimum. When you use a credit card, you’ll receive a bill with a minimum payment due each month. By paying more than the minimum, you can pay off your balance quicker and reduce your overall interest costs, which will also help boost your credit score. Plus, this helps lower your credit utilization ratio.
Dispute any incorrect information. Fraudulent activity can hurt your credit score and result in lost funds. While we actively monitor suspicious activity, you should also review your account regularly. If you spot any mistakes, notify us right away so we can resolve the issue and help restore your credit.
Features of Opportunity Checking
Alltru’s Opportunity Checking is an accessible product we offer for those who are typically turned away by other financial institutions. An accessible Checking account is key for being able to make your payments, avoid credit card debt, and build your credit. Here are some of the perks of Opportunity Checking.
Help improve your credit score. We understand that Checking accounts are essential for easily paying toward loans and credit cards. If you’re just starting to grow your credit or if you need to recover from a poor credit history, many find it difficult to get approved for a Checking account. Our Opportunity Checking account was designed for those with low or no credit to eliminate this obstacle. If you are eligible for membership, apply for an account now.
Pay low monthly fees. Many financial institutions charge high monthly fees to customers and members with low credit scores. At Alltru, our small monthly fee keeps more of your hard-earned money in your account.
Use essential banking tools. Opportunity Checking accounts can be accessed through online and mobile banking. These tools allow you to control your debit card, deposit checks digitally, and schedule bill payments. In addition, you can use over 35,000 ATMs from the shared branch network across the country.
Let us help you. Our CCUFC certified counselors are here to help your build your credit. Our team has gone through extensive training and practice to help you make the best financial decisions for your situation and goals. You can also use Zogo gaming for free. With Zogo gaming, you can earn real rewards for completing applicable financial literacy lessons.
Credit Builder Loan Tips
Alltru’s Credit Builder loan is an accessible financial tool to help you build credit in a low-risk way. When used correctly, you can improve your credit score. Here are some perks and tips for paying your Credit Builder loan.
Establish a credit history. Many lenders require a positive credit history to offer auto loans, credit cards, and mortgages with manageable interest rates. If you’re new to building credit, a Credit Builder loan is an excellent way to get started. With low monthly payments and competitive interest rates, you can build your credit over time and move closer to your financial goals.
Boost your credit score. A Credit Builder loan is an effective tool for improving your credit score. Unlike loans for physical items that lose value, this type of loan lets you make manageable payments each month, building a positive credit history without committing to something you don’t need.
Make minimum payments on time. Just like any other loan, making timely minimum payments on a Credit Builder loan helps raise your credit score. Each payment brings you closer to paying off the full loan. Failing to make the minimum payments on time, however, could harm your credit and make the loan ineffective.
Assess your financial situation. If you already have existing loans or credit cards, consider waiting before applying for a Credit Builder loan. Focus on paying down your current debt to boost your credit score and credit utilization first. If you’re close to clearing small balances and your credit score remains low, a Credit Builder loan can help you move forward.
Build a small savings cushion. Before committing to a Credit Builder loan, review your savings. If you don’t have money set aside for emergencies, you may struggle to make loan payments if unexpected expenses arise. It’s a good idea to establish an emergency fund before taking on a new loan. Failing to make payments on time could negatively impact your credit score.
Conclusion
Understanding the fundamentals of your credit score is key to achieving success. While your credit score is just a snapshot of your overall financial health, your credit history provides the complete picture. Remember, third parties can access your credit history through both hard and soft credit inquiries. To build your credit score, it’s important to understand how credit works. By responsibly managing lending products like credit cards, personal loans, and home loans, and making timely minimum payments, you can improve your credit score. If you have less than ideal credit, we’re here to get you the tools you need. Ready to open your next loan or credit card? Start with Alltru.
