How to Build Your Credit Score

People are often surprised to learn what their credit score number is — and even more amazed to see how quickly their financial activity can cause it to go up or down. There’s no reason to track your score every day or even every week. Once a year is usually enough, but some experts suggest checking your credit once a month just to make sure you’re doing what you need to keep it “healthy.” And don’t worry, no matter how often you check it, all that peeking will not negatively impact your score.

*Image Courtesy of Experian 

What Exactly Is a Credit Score?

A credit score is an “at the moment” image of your credit health based on the data contained in your credit report. If you have credit cards or loans, there’s a credit report with your name on it continually being monitored and updated by the country’s three major credit reporting bureaus, Experian, Equifax, and TransUnion. 
 
Your credit report itemizes key financial behaviors and your credit status, including balances owed on credit cards and loans (home, auto, etc.), how promptly you pay your bills, how many credit accounts/cards you have, and the number of inquiries into your credit (for new loan purposes or a new credit card, for example).
 
All this data is regularly compiled and quantified, and then it’s evaluated using FICO scoring models. The outcome after all these calculations is your credit score. FICO scores are used in more than 90% of the credit decisions made by lenders in the U.S. So what’s considered a good credit score? Scores typically range between 300 and 850. The higher your score, the healthier your credit rating. Experts suggest shooting for a score of at least 650 or above to be considered a good credit risk by lenders. Above 800 is considered excellent credit.

Why Is a Good Credit Score Important?

Lenders use your credit score and credit report to decide if they’re going to lend you money for large purchases, for example, to buy a home or a new car. By researching your credit health, lenders decide if you’re a “good risk,” meaning they can count on you to repay the loan on time, and in full, without complications. The better your credit score, the more likely a lender will be to loan you money, because the scoring model says you’ll be less likely to fall behind on your payments.
 
Keep in mind, lenders also factor in other considerations like past loan behaviors, your salary, how long you’ve been employed, current market events, interest rates, and even the effects of the pandemic, when determining whether to approve a loan. The bottom line is, having a low score can limit your ability to be approved for all kinds of large-purchase loans, and can also affect your ability to be approved to rent an apartment or get credit cards from major retailers.

How to Check Your Credit Score

By law, everyone is entitled to a free credit report from each of the three credit reporting bureaus once a year. But you can hop onto each of their websites and check your credit score anytime you like.
 
Of course, the score is just a number — it doesn’t tell the story of why that score is high or low, or why it might have changed. For that, you need to delve into the details the credit report provides. Be sure to take advantage of the free annual checkups, but also consider subscribing to a year-round monitoring service for at least one of the credit reporting agencies. This can be especially helpful if you’re planning to be in the market for a new home or car in the coming months.

What to Do If You Want to Improve Your Score

The good news is, it’s within your control to help raise your credit score. Here are six steps to take that can help improve your credit score:
 
1. Establish some credit — Open one to two major credit cards in your name that will be reported to the three credit card bureaus. This is especially important for new college graduates entering the workforce and hoping to make their first major purchases. You can’t establish good credit unless you have at least some credit activities in your name as the primary account holder, or by becoming an authorized user on someone else’s credit card.
 
2. Keep your revolving credit card balances low — Be careful to stay under your credit limit and, if possible, pay your bill in full every month. If you can’t do that, be responsible with credit card use and reduce the amount of credit you’ve borrowed against each month.
 
3. Pay your bills on time (credit cards, utilities, rent … all of them) — Did you know that one late payment can stay on your credit report for up to seven years? One of your credit goals is to create a good payment history in which you regularly pay your bills on time. Consider setting up autopay to help make sure your payments get posted by the due dates. If you’re having trouble paying your bills, contact the credit card company immediately for help with setting up payment options.
 
4. Attend to accounts that are past due — A history of late payments, or even one in some cases, can seriously ding your credit score. If you’ve got bills piling up, it may be time to talk with a credit counselor to set up a payment plan you can stick with. There may even be opportunities to lower your payments and/or interest rates.
 
5. Apply for new credit accounts thoughtfully — While it may be tempting to get that extra 15% off your purchase for opening a new credit card, this type of activity can negatively impact your score in the short term. The more credit card and/or loan applications you fill out, the more inquiries get made to the credit report bureaus, and that can negatively affect your credit score for up to two years.
 
6. Understand your credit utilization ratio (CUR) — The scoring models used to calculate your credit score generally take a hard look at something called your credit utilization ratio. While it sounds complicated, very simply it’s how much you owe compared to how much credit you have available.
 
The equation is as follows: Take the sum of all your revolving credit debt (typically credit card balances), multiply it by 100, and the result is your utilization ratio percentage. As an example, say you owe $4,000 in credit card balances, and you have $40,000 of available credit. Your utilization ratio would be 10%. Below 30% CUR is good, but financial experts will tell you to stay at or below 10% to maintain an excellent credit score.

Let Us Help with Your Credit Needs

The team at First National Bank and Trust can provide Sound Advice and guidance when it comes to how you can improve your credit and how we can help you qualify for lines of credit and loans. We’re available to chat by phone at 1-800-667-4401, or you can contact us online via our message form options.

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