Improving Your Credit Score

Improving Your Credit Score

Four Ways Use Your Credit Cards to Improve Your Score

Establishing and maintaining good credit is an extremely important component to helping you reach your financial goals. Why? Because access to credit (a loan, credit card etc.) can be used to help facilitate the purchase of goods and services that otherwise may not be possible. Take purchasing an automobile, or home, for example. These are large ticket items that many people don’t have the cash to pay for outright. As a result, a loan is often needed in order to make these items more attainable.  To get a loan, you need good credit. Generally speaking, the better your credit score, the lower the interest rate or APR on your loan, which makes borrowing money more affordable.

What is your credit score?

Your credit score is a three digit number that tells a lender how likely you are to pay your credit obligations as agreed. There are three main credit bureaus that create your credit score – Equifax, Experian and TransUnion. These agencies receive information from creditors, usually monthly, about whether you are making loan and credit card payments on time. They also collect information about bankruptcy filings, court-ordered judgements, tax liens, and other public information from courthouse records. They then create credit reports with the help of scoring models like VantageScore and FICO.

What is considered good credit?

The scores usually range from 300 to 850. Each lender has their own guidelines as to what good credit means but generally speaking, a credit score of 300 is considered poor credit and 850 considered excellent credit. However, any score above 690 is considered good credit. Having a score below 690 could indicate that improvements may be needed in how you manage your credit.

How to use credit cards to improve your credit score

Your credit score is dependent on a variety of factors including your payment history, your total debt balance, new credit, length of credit history, and credit mix. Whether you need to build your credit history or improve your credit score, using a credit card to make your everyday purchases can help you do both.  That’s because using credit cards wisely can help improve many of the factors that make up your credit score. Here’s how:

1. Pay Credit Cards On Time
   Your payment history helps creditors predict when and how you will pay back your loan. Simply put, it tracks how long you have had credit accounts and whether or not you’ve paid at least the minimum payments on time each month. If you are making your minimum payments on time each month for all credit accounts, your payment history should be good. If you are frequently late, don’t pay the minimum due, or even skip payments altogether, your payment history could be negatively impacted.
   
   Your payment history makes up the bulk of your credit score according to all three major credit-reporting bureaus: 35 percent according to Experian and Equifax; and 40 percent according to TransUnion. Therefore, improving your payment history will have a big impact on your credit score. To lift your credit score by improving your payment history, be sure to pay at least your minimum balance (preferably the full balance) on time, every month.
   
   
2. Pay Your Full Balances Each Month
   Another major factor of your credit score is your credit utilization rate, accounting for 30 percent of your credit score according to Experian and Equifax; and 20 percent according to TransUnion. To calculate your credit utilization rate, divide your current outstanding credit balance (what you owe) by the total amount of all of your credit limits. The resulting percentage is your credit utilization rate. The lower the percentage, the better. Paying off your credit card balances in full each month will help keep your credit utilization rate low and help to improve your credit score.
   
   
3. Don’t Open Too Many Accounts
   It’s tempting to apply for various credit cards, including retail credit cards, in order to get a special bonus or a “deal” on your purchase. But doing so could negatively impact your credit score, especially if you are new to credit and/or you open several accounts in a short amount of time. That’s because creditors view having too many credit card or loan accounts as risky. It can also negatively impact your credit history (more on that next).
   
   New credit accounts for approximately 10 to 12 percent of your credit score, according to Experian and Equifax; and 5 percent according to TransUnion. To help improve your credit score, it’s better to have one or two credit cards that you use for all of your purchases as opposed to several different ones. You can still take advantage of perks or deals on your spending by finding a credit card that offers rewards such as cash back rewards or frequent flier miles.
   
   
4. Don’t Close Too Many Accounts
   Your credit history makes up about 15 percent of your credit score according to Experian, five to seven percent according to Equifax; and 21 percent according to TransUnion. It reflects how long you have had open credit accounts. Having accounts open and managing them well over a long period of time can improve your credit score. As mentioned above, opening several new accounts can hurt your credit history because doing so adds several accounts to your profile that have been open only a short time. Closing existing accounts can hurt it too, because you are removing accounts from your profile that have been opened for a longer period of time. Again, find one or two credit cards that meet your needs and stick with them for the long-haul to make your everyday purchases.

Monitor Your Credit Score

Managing or improving your credit starts with knowing where you stand. Therefore, it’s important to view your credit report at least once per year. Doing so also helps protect yourself against identity theft by providing you with the opportunity to potentially catch fraudulent or suspicious activity that may affect your score such as new and/or unpaid credit accounts that you didn’t open. Per the Fair Credit Reporting Act (FCRA), you may order one free copy of your report from each of the credit reporting companies (Equifax, Experian and TransUnion), at least once every 12 months. You can request these copies of your credit report each year by visiting annualcreditreport.com.

Managing and improving your score is a journey, not a destination. It requires good financial habits and ongoing discipline to achieve and maintain a good credit score. Fortunately, something as simple as using one or two credit cards and managing them responsibly can help you get there. FNBO has a variety of credit cards available to help meet your spending needs.  Whether you want rewards, cash back or a great rate, we’ve got your back.