Understanding and Improving Your Credit Score


February 10, 2021



financial education

Your credit health plays a big role in your financial future. Strong credit health can help you qualify for loans with low interest rates, saving hundreds or even thousands of dollars in the long run. On the flip side, poor credit health could become something that hinders your chances of getting the loan you need to buy a home, finance a car or qualify for credit cards.

The first step to achieving strong credit health starts with understanding the ins and outs of your credit score. Learning about your credit score and what you can do to improve it will help you unlock your full credit potential and achieve your financial goals.

How your Credit Score is Calculated Credit bureaus collect millions of pieces of data that scoring agencies and others crunch to create credit scores. How do they get all this data? When it comes to credit, financial institutions such as banks, credit card companies and other lenders have a dual role. The have a role in approving people for the credit they need. But, they also play a collective role in sharing information with credit bureaus about consumers’ credit behavior, which is then compiled into credit reports.

Lenders and creditors with whom you have a loan, credit card or other credit account, report information about your credit activity to the credit bureaus. This includes details like the balance of your account, amount paid, amount due and the payment status. Each time you apply for credit and a financial institution requests your credit report from a credit bureau, it is included on your credit report as a hard inquiry.

Scoring agencies, like FICO and VantageScore, use the information in your credit report to calculate your credit score. FICO and VantageScores range from 300 to 850 and incorporate five factors into the scoring model including payment history, credit utilization, average age of accounts, types of credit in use and new credit. The Top Factors that Impact Your Credit Score

1. Payment History Your payment history is generally the most important factor in calculating your credit score because it shows lenders whether you’ve been reliable in making consistent on-time payments – an indicator that you’re likely to pay back your debts in the future. For this reason, just one or two late payments could significantly hurt your credit score.

2. Credit Card Utilization Credit utilization ratio – also known as debt-to-limit ratio – measures the amount of your overall credit card limit that you are using. A good rule of thumb is to keep your credit utilization ratio below 30%, but the lower the better. A high credit utilization ratio can lower your credit score and may make potential lenders worry that you’re overextended and may not be able to handle more debt. Your credit card utilization ratio is calculated by dividing your total outstanding balances on all of your cards by your total credit limit.

3. Age of Credit & Established Credit History Establishing a long credit history usually improves your credit score as long as you have a history of consistent on-time payments on your open accounts. Factors that feed into this element of your credit score include how long all of your credit accounts have been open (the age of your oldest account, the age of your newest account and an average age of all your accounts), how long specific credit accounts have been open and how long it has been since you used each account.

4. Credit Mix and Number of Accounts in Use The number and the mix of credit accounts that you have in use – credit cards, auto and student loans, mortgages and other lines of credit – all contribute to your credit score. In general, having more open credit accounts leads to a better credit score. Why? Having more accounts means you’ve been approved for credit by more lenders. In addition to your number of open accounts, having a diverse mix of credit across the two main categories, revolving credit and installment loans, may also improve your credit score.

5. Hard Credit Inquiries and New Credit Each time someone pulls your credit report, a lender, landlord or insurer, an inquiry is documented on your credit report. Keep in mind that there are two types of credit inquiry, hard and soft inquiries and only hard inquiries are visible to others on your credit report and impact your credit score.

  • Hard inquiries occur when a financial institution accesses your credit report when you apply for credit. Hard inquiries are typically only made with your permission. Hard inquiries are visible to anyone who accesses your credit report and they are reflected in your credit score.

  • Soft inquiries occur when someone accesses your credit report—but not because you are applying for new credit. Soft inquiries can be made without your permission. They are recorded on your credit report but they are only visible to you and they are not reflected in your credit score.

Lenders who see that you have many recent inquiries may worry that you are applying at several places because you’re unable to qualify for credit or may be desperate for money.

The Bottom Line From getting a low-interest personal loan to consolidating your credit card debt to buying your first home, strong credit health can be empowering and help you achieve the financial goals you’ve set. Achieving good credit health begins with knowing your credit score and where you land on the credit score spectrum, understanding what’s in your credit report and learning what actions you can take to maintain or strengthen your credit health. Check your credit score regularly and review your credit report annually to take better control of your finances and reach your full credit potential. Visit www.merckcu.com to apply for a loan or credit card today.

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