by Emily Hechler 
Your credit score is a key indicator of your financial history. While many people understand that having a high credit score is important, they many not fully grasp why it matters or how to improve it. We’re here to help you achieve credit score success. This resource will give you the basics of a credit score, how it decreases, how it increases, and how you can keep yours trending upward.
Credit Score Basics
In order to understand your credit score better, it’s important to start with the basics. Credit is your ability to borrow money by making purchases with the understanding that you will need to repay the amount back at some point. Loans often have payment plans, so you know exactly how long and how much you will be making payments to settle the balance. However, credit cards have a minimum payment, so the exact date of settling your balance isn’t predetermined.
Credit has three key aspects: credit reports, credit scores, and credit monitoring.
Credit reports are detailed summaries of your personal credit history. These can can be accessed through Experian, Equifax, or TransUnion. These reports include information such as account opening dates, loan balances, payment history, and more. A portion of your credit report contains your credit score.
Credits scores are tools used by lenders that often determine if you qualify for a loan and what interest rate you’ll receive. Credit scores range from 300 to 850, and the higher the number, the more favorable of a credit score. There are five factors that determine your credit score. Your payment history makes up 35% of your credit score. The amount you owe through loans and credit cards determines 30% of your credit score. The length of your credit history makes up 15% of your credit score. The amount of new credit you have makes up 10% of your credit score. Finally, the variety of lending products you have determines 30% of your credit score.
Credit monitoring is essential to ensuring your credit history and credit score are accurate. You are entitled to one free credit report per year from one of the three credit bureaus previously mentioned. When you pull your credit report, make sure all the information is accurate. Mistakes may take a while to correct. It’s important to proactively monitor your credit so you know the data before applying for a new account.
Hard vs Soft Credit Checks
When a potential employer, lender, yourself, or anyone else checks your credit report, this is called a credit inquiry. Credit inquiries are often called credit checking or credit pulls. Some credit inquiries can impact your credit score. Here are some facts to know about hard and soft credit inquiries.
Hard credit inquiries impact your credit score and happens when you apply for a new lending product, like a loan or a credit card. When you apply, the lender reviews your credit report to determine the risk of giving you the product. This is necessary to determine how much available credit you currently have vs how much you use, and the likelihood of timely payments. Hard inquiries can decrease your credit score by a few points.
Soft credit inquiries do not affect your credit score. When you pull your credit history from one of the major credit bureaus, this is a soft credit inquiry. As previously mentioned, you are entitled to one free credit report each year. It’s important to do so to keep tabs on your financial situation. A soft credit inquiry can occur when you apply for preapproval of a lending product. If you receive a letter saying that you’re prequalified for a credit card or insurance bundle, the party performed a soft credit inquiry. Rest assured that this did not impact your credit score.
Before you apply for a new lending product, determine how necessary it is for your current financial situation. Also consider your credit score. After that, do your research to determine if you will qualify for the product. An application is a sign that you may take on more debt, which is why your score will decrease. When you evaluate these factors, you might discover that it’s in your best interest to wait another six months before applying for the product. In the meantime, you can focus on raising your credit score. That way, you will minimize the damage of the hard credit check.
Credit Building Products
A high credit score is a safety net for your finances. When unexpected situations arise, or you need funds for a large project, a high credit score will help you secure loans with lower interest rates. When you pay your minimum payments each month on time, you’ll help increase your credit score too. It’s a win-win situation. Here are four products you can use in these scenarios.
Use your credit card. In emergency situations, a credit card is a great tool to have to pay for unexpected expenses. Keeping your balance low relative to your credit limit improves your credit utilization ratio, which increases your score and helps you get lower interest rates in the future.
Take out a Personal loan. A Personal loan is a great option when you need a large amount of funds fast. Qualified borrowers do not need collateral, so the approval process is quick too. Making timely payments on a personal loan can help increase your credit score too.
Borrow against the equity of your home. As you pay for your mortgage, your money is divided between the principal and the interest. The total amount paid toward the principal represents the equity you have in your home. With a Home Equity loan, you can borrow against the equity of your home. You can secure a lower interest rate with a high credit score.
Open a HELOC. Another option that lets you borrow against the equity of your home is a Home Equity Line of Credit, or HELOC. A HELOC allows you to borrow against your home’s equity as needed, similar to a credit card. Regular, on-time payments will strengthen your credit score.
5 Tips for Improving Your 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 that way.
Build your credit score wisely. Having no credit score raises concerns for lenders. Your credit score is an indicator to financial institutions and lenders of your reliability as a borrower. No credit score means you don’t have any documented repayment experience. To start building your credit score in a low risk way, open a Credit Builder Loan or a Secured Credit Card.
Choose the right credit card. With so many credit card options, it can be difficult to know which one you should use. As you consider applying, compare your available options. A store credit card can get exclusive discounts from retailers along with high interest rates. A Rewards Visa Credit Card earns you points for every dollar you spend. Read the fine print so you know what you are signing up for.
Monitor your credit score. To make sure your credit report accurately reports your history, first check your credit score. If you notice a decrease, find out why this happened. Access your free credit report to see if there were any mistakes or fraudulent activity. Remember, this is a soft credit inquiry, so this won’t decrease your credit score even more.
Meet your payment deadlines. The most effective way to raise your credit score and to keep it high is by making your minimum monthly payments by the deadline. If you have trouble making your payments on time, create a budget to ensure you are spending your money the right way. In addition, you can set up automatic payments with online and mobile banking. This way, you won’t miss a deadline simply because you forgot!
Eliminate your debt. Paying off your debt takes time and discipline. As you make your payments over time, you’ll start to notice your credit score increases. Your credit card and HELOC work like a revolving door. The lower your credit utilization, the higher your credit score too. Focus on paying down these to see a faster boost.
Credit Score Q & A
To set yourself up for credit score success, you must know the answers to key questions about the system. While this guide has answered many already, you may still have a few questions about your credit score. Here are answers to some common credit score questions!
Does paying off my debt immediately remove it from my credit report? Unfortunately, no. Your credit history notes the past seven to ten years. Paying off your debt is a good thing, but it will still be part of your credit history for a while. However, the report will show that your debt has been paid. When you apply for another loan, keep this in mind.
If my spouse has good credit, do I need to improve mine? Yes! If you apply for a lending product together, the lender will look at both partners’ credit scores. Your lower credit score can increase interest rates or cause the pair to not qualify. However, if you qualify together despite a low credit score, meeting your minimum monthly payments on time can raise your credit score.
Is my credit score the same across all three major credit bureaus? Maybe. It’s possible that not all your accounts and lenders report to all three major credit bureaus. This means that your credit score may be slightly different according to each one. In addition, all three credit bureaus might not update their reports on the same day, causing another discrepancy. While your credit score is a key financial indicator, take it with a grain of salt.
Where can I find reliable credit score resources? Alltru’s Blog and Learning Center are full of articles to help you answer financial questions and learn about the different aspects of money management. To provide you with the best service possible, we want you to know what we know! Major credit bureaus Experian, Equifax, and TransUnion also have helpful resources about your credit score and personal finance.
Conclusion
Understanding the basics to your credit score is the first step to credit score success. Even though your credit score is just a snapshot of your full financial picture, your credit history tells the full story. Keep in mind that third parties can access your credit history through hard and soft credit checks. Responsibly managing lending products like credit cards, personal loans, home equity loans, and more can help you improve your credit score by making timely, minimum payments. If you are ready to open your next loan or credit card, start at Alltru.
