Understanding your credit score and accessing your report
What is a credit score?
Credit Reporting Agencies use a credit score model to mathematically calculate your credit score from information in your credit report. Each of the three main Credit Reporting Agencies have their own credit score models, so you may see multiple credit scores based on the data used, the timing of the calculation and the credit score model used.
This score is a prediction of your credit behavior for certain actions like how likely you are to pay a loan back on time.
What data goes into a credit score?
Credit score models and calculations typically look at factors such as:
- On time and late payments
- Outstanding account balances and total available credit
- The total number and types of accounts
- The age of your accounts and new applications for credit
- If you have been involved in collection efforts, foreclosure or bankruptcy
Your credit score impacts a variety of aspects of your life. Your credit score can affect your loan options, interest rates and credit limit. Your credit score can also affect your housing options, job opportunities and negotiating power, with other companies, which is why knowing and understanding your credit score is crucial.
How do I build my credit?
- Make timely payments
It may sound obvious, but making your payments on time is an important step toward building your credit.
When you miss a payment, you’re sending a message to lenders that you may be an unreliable borrower. Your payment history is a strong indicator of the type of borrower you will be, and what your credit behavior is.
You should only make charges on your credit card if you’re certain you can pay them back. Be aware of your payment deadlines and pay them on time.
With First Tech’s Digital Banking, you can view your bills online, make payments and automate future payments, reducing the chance of missing a payment, all in one place.
- Limit requests for new credit
Every time you apply for credit, the lender will perform a credit check and this credit inquiry may lower your credit score. They do this because when people are having trouble managing their finances, they may take on more debt to make ends meet. The more debt they have, the harder it is to make payments on time.
You should be cautious when increasing any of your credit limits or applying for new accounts. It’s best to work within the credit lines and limits you already have. For some people, an increased limit allows them to feel like they can spend more, so it’s best to act with caution and show potential creditors that you’re capable of managing your credit with the resources you already have.
It’s worth noting that some creditors also increase your credit limit on their own without asking. In this case, the consumer can contact them to have the credit limit lowered if they choose.
- Monitor your report
It’s important to review your credit reports. Each year, you can request a copy of your credit report from each of the three major credit reporting agencies for free at annualcreditreport.com.
We suggest you use annualcreditreport.com to check your report regularly. Just note that it will cost money to check your score more than once every 12 months, and be careful not to sign up for a monitoring service if you don’t want it.
If you discover an inaccuracy in your credit report, you’ll want to be sure to submit a dispute to be investigated and removed by the agency. To do this, you’ll need to contact the credit reporting agencies as well as the business that reported the inaccurate information. They will investigate and keep you informed of what they find.
- Understand loan types
Lastly, you should be aware that there are different types of loans, which work in different ways and may provide you with different benefits.
Credit cards are a form of revolving credit. Revolving credit allows you to borrow money as you need it and pay it back on a monthly cycle, or in larger amounts as you are able. As you pay it back, the unused portion of your credit line is available again for you to borrow against. While this type of credit is convenient and flexible, you’re also obligated to pay back the borrowed money, plus interest. Because minimum payments for revolving loans are calculated every month based on the outstanding balance and interest accrual, these types of loans can take longer to pay off than other types of credit.
Installment loans such as automobiles, mortgage and personal loans provide borrowers with a fixed sum of money upfront and require them to pay it back in fixed scheduled payment amounts until the loan is paid in full.
Revolving credit interest rates are typically higher than installment loans due to the flexibility they offer, which lenders typically consider more of a risk. Because of this, options like consolidating your credit card debt to a lower-rate, fixed-term installment loan may save you a considerable amount of money and help you pay your loans back faster.
Managing credit on your own can be tricky, but First Tech can help. If you have questions about credit, schedule a virtual or in-person appointment to speak with one of our financial professionals.