What is a Credit Score?

Let’s take a step back and break down a credit score in simple terms. Imagine your credit score as a recipe for a delicious dinner. These five ingredients heavily impact your credit score:

• Payment History (35%): This ingredient reflects your track record of making timely payments.
• Credit Utilization (30%): It measures the percentage of your available credit that you’re currently using.
• Length of Credit History (15%): This ingredient considers how long you’ve been using credit.
• Credit Inquiries (10%): Every time someone checks your credit, it affects your score.
• Types of Credit in Use (10%): This ingredient takes into account the diversity of credit accounts you have.

Although these factors may appear separate, they actually work together like the ingredients in a recipe. It’s essential to maintain a balance of all five to avoid throwing off the recipe and harming your credit.

Now that we have a bit of background let’s define a credit score. It’s a number ranging from 300 to 850 that indicates how well an individual has managed their debt. Lenders rely on this number to assess your reliability as a borrower.

Credit Score Range and Why It Matters

Credit scores typically span from 300 to 850, and similar to school grades, a higher score is better. Here’s a breakdown of the different credit score ranges:

• Very Good (740-850): Falling within this range showcases excellent credit management. You’re likely to have access to a wide range of credit options and receive favorable terms from lenders.
• Good (670-739): A good credit score demonstrates responsible credit management. Lenders generally view you as a reliable borrower, and you’ll likely qualify for favorable terms and rates.
• Fair (580-669): With a fair credit score, there’s room for improvement. You may face some limitations when seeking credit, but there are still options available to you.
• Poor (300-579): Falling into this range indicates a poor credit score. It’s essential to take steps to improve your creditworthiness.

Remember, these ranges provide a general idea of where your credit score stands. Aim to maintain or improve your credit score to enhance your financial opportunities and secure better borrowing terms.

How to Establish or Improve Your Credit Score

Apply for secured credit Cards

Consider applying for secured credit cards if you’re looking to establish or improve your credit. Secured credit cards function by requiring a cash deposit, which is equal to the card’s available balance. The credit card issuer holds this deposit while your account remains open. By paying the cash deposit, you secure your credit limit.

Secured credit cards are specifically designed for individuals with limited or poor credit histories. They often come with lower credit limits. However, they serve as a valuable tool for building or rebuilding your credit by making timely payments.

You might wonder, “Why should I bother with a secured credit card when I can simply pay for things with cash?” Cash transactions don’t get reported to the three credit bureaus responsible for determining your credit score. On the other hand, using a secured credit card allows your payment activity to be reported, contributing to the growth of your credit score.

By obtaining a secured credit card and demonstrating responsible credit usage, you can effectively build a positive credit history, paving the way for better credit opportunities in the future.

Become an Authorized User

Consider becoming an authorized user on a family member’s or friend’s credit card account to enhance your credit. When someone adds you as an authorized user, you gain access to their credit card’s benefits. Advantages of this arrangement include their credit limit and payment history being reported to the three major credit bureaus, thereby boosting your own credit score.

However, if the person who adds you as an authorized user starts to exhibit reckless behavior with their card, such as missing payments or maxing out the credit limit, it can have a negative impact on your credit score. So, make sure to choose someone you wholeheartedly trust before pursuing this option.

Getting Credit for the Bills You Pay

Numerous websites and apps are available to aid in credit building. Among these helpful resources are credit reporting services that enable you to include your monthly bills on your credit report. This practice builds a positive track record of timely payments, which in turn improves your credit history.

It’s worth noting, however, that not all three credit bureaus consider these types of credits when calculating your credit score. Therefore, it’s important to conduct thorough research and ensure that the credit reporting service you choose aligns with your goals.

Helpful Credit Tips 

• Always try to make your payments on time and pay at least the minimum amount due. Paying your credit on time is one of the most important things you can do. 35% of your credit score is made up of your payment history. Never missing a payment is key to keeping your score high. Also, paying more than the minimum amount due can help increase your credit. 
• Keep your credit utilization as low as possible. Credit cards can be helpful if used responsibly. They offer you credit limits, but they do not want you to use more than 30% of it if you carry a balance month to month. However, they never spell this out for you in plain English; they just expect you to know this. Do not get stars in your eyes seeing a $1,000 limit, because it is really only a $300 credit limit. The lower your credit utilization, the better it is for your overall credit score. 
• Try not to apply for multiple credit accounts at once. All credit applications can cause a small dip in your credit score. If you go out today and submit six different credit applications, you can do significant damage to your credit score. If possible, spread out your credit applications over a few months. To avoid multiple credit inquiries, do research and compare and contrast loans before applying. Try to get pre-qualifications before applying so your credit is not affected if you do not qualify. 
• Do not let your credit card accounts close. The longer your credit account has been open, the better. Try to keep your credit card accounts open unless you have a good reason to close them, like high fees or poor experience. Letting accounts close can hurt your available credit rating and reduce your credit score. 
• Monitor your credit regularly. Monitor your credit regularly so that you can keep track of your progress. As you make changes, getting new forms of credit, it will take time for your score to adjust. Scores update monthly, so be sure to track them regularly. 

Frequently Asked Questions

• What do you mean by credit score?

A credit score summarizes your credit behavior, such as how likely you are to repay your debts, how much debt you currently have, and how often you are applying for new forms of credit. 

• What raises credit scores?

The best way to raise your credit score is by opening new accounts that report to the three credit bureaus, Equifax, Experian, and TransUnion. Paying all your bills on time and limiting how often you open new credit accounts also helps improve your credit score. 

• What lowers your credit score? 

Not paying bills on time or using too much of your credit limit are the quickest ways to lower your credit score. 

Final Thoughts 

Credit scores can be complex and challenging to grasp fully. That’s why countless books on the subject exist, as it remains a hot topic with a wealth of information available. Rebuilding a low credit score can be an uphill battle, making it crucial to conduct thorough research early on to prevent any potential damage to your credit history. 

By equipping yourself with knowledge from the start, you can set a solid foundation and avoid unnecessary setbacks to your credit score. For more information, please visit our website, Business Banking, Loans, Treasury Management – Texas Regional Bank.