Your Credit Score: What It Is, What It Means, and How to Improve It

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What is your credit score?

Credit scores usually range from 300 to 900, and anything over 700 is considered a good credit score. These scores are given by three separate agencies: Experian, Equifax®, and TransUnion.®

Your actual credit score is a mathematical equation that is evaluated according to different criteria on the report. To break it down: 35 percent is payment history; 30 percent is amount of money owed; 10 percent is the type of credit used – mortgage, auto, store charges, credit cards, etc.; 10 percent is new credit and the length of time you have been in the credit file; and the last 15 percent is length of credit history.


Why is it important?

Your credit score is important because it allows you to secure goods and services now and pay for them later. Your credit score helps to increase the confidence of creditors and lenders when providing you with rates. Your credit score also helps to determine the interest rates and fees you pay.


How do you get on the path to good credit?

The best way to start, is to set up an account with a financial institution and demonstrate responsible use of that account. Start slowly – begin with a checking account, then apply for a small car loan or secured credit card and pay on time. Remember to always keep your balances low because 30 percent of your credit score is based on amount you owe. If you can pay off the amount owed in full, do so.

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Are store credit cards a good choice?

The hierarchy of credit goes as follows: mortgage credit, then auto loans, secured loans, national credit cards, store charges, and then finance companies. Store charges and finance companies hurt your credit the most. These usually charge a high rate of interest in exchange for quick cash. It’s better to stick with a national credit card like VISA®, Mastercard, Amex, or Discover – rather than a store card. You usually get a better rate in the long run, even if the store is offering a percent discount to open the account that day. Your score can be affected in the areas of credit type used and new credit.


To close or not to close?

Don’t close unused credit cards to boost your score. It affects your balance to limit ratio. That ratio will increase if you are closing a credit line and you want to keep that ratio under 50 percent. Use your typically unused card once or twice per year to keep it active. Charge something once and pay it off, just to keep the card. You usually need some activity to keep your account open, as most companies will close out inactive cards.


Freecreditreport.com or what?

There is a difference between consumer and purchased lending scores. You won’t get the same score if you pull it up online and if a lender pulls it up. Learn more about variations in credit scores.

Remember: There is no easy way to boost your score and it takes time. For more information on consumer credit, visit www.ftc.gov. First Financial also offers credit score counseling services with First Score.

And, be sure to subscribe to our blog to stay updated on our free credit management seminars – we hold one per year. If you have any questions about your credit and would like more information contact us.

 

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