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Credit Score Basics U Should Know

UMe team member pointing to the words, Learn all about credit scores.

Here at UMe, we love helping. We especially love helping our members. (It’s our favorite!) And in the spirit of helping, we want U to have general knowledge about credit scores because paying attention to your score, and taking steps to improve it can open up great opportunities!

Learning about credit scores and how they work is important because it can help U make better financial decisions. Having a greater understanding and using this knowledge can also improve your creditworthiness. Understanding how lenders assess creditworthiness and how they make decisions about whether to approve someone for a line of credit, and at what interest rate, can really give you a leg up! Knowing how credit scores are calculated and used can help U improve your own score and avoid common mistakes that can negatively impact your score; They can also make U more capable of protecting yourself against identity theft.

Ultimately, learning about how credit scores work can help U take control of your financial life, and make better decisions about borrowing and managing credit. So, let’s start at the beginning —

WHAT IS A CREDIT SCORE?

A credit score is a numerical value that reflects an individual’s creditworthiness based on their credit history. Think of it like your GPA except it’s the grades of your financial life. Credit scores are used by lenders, such as credit unions, banks, and credit card companies, to determine an individual’s likelihood of repaying their debts on time.

HOW ARE CREDIT SCORES USED?

Credit scores are used by lenders to determine whether to approve an individual for credit and at what interest rate. A higher credit score indicates that an individual is at a lower credit risk and may qualify for lower interest rates and better terms on loans and credit cards. On the other hand, a lower credit score may result in higher interest rates or worse — a denial of credit altogether. 

Here are 5 examples of credit score uses that rely on one’s score that U should know:

  1. Access to credit: A good credit score can make it easier to get approved for credit cards, loans, and mortgages. It can also result in better interest rates and terms, which can save you money in the long run.
  2. Employment: Some employers may check credit scores as part of the hiring process, particularly for positions that involve handling money or sensitive information.
  3. Insurance rates: Your credit score can also impact your insurance rates, with lower scores potentially resulting in higher rates for auto, homeowner, or renter’s insurance.
  4. Housing: Landlords and property managers may check credit scores when considering rental applications. A low credit score could make it more difficult to rent a home or apartment.
  5. Financial goals: If you have financial goals, such as buying a home or starting a business, a good credit score can make it easier to achieve those goals by giving you access to credit and better terms.

WHAT AGE DO U GET A CREDIT SCORE?

A credit score starts to be generated as soon as an individual opens a credit account, such as a credit card, loan, or mortgage. Typically, this happens when an individual turns 18 and becomes eligible to apply for credit. However, if an individual does not have any credit accounts in their name, they may not have a credit score until they open their first credit account. It’s important for individuals to start building a positive credit history early on by paying bills on time and keeping credit utilization low to establish a good credit score.

HOW ARE CREDIT SCORES CALCULATED?

Credit scores are calculated using information from credit reports, which include details about an individual’s credit accounts, such as credit cards, loans, and mortgages, as well as their payment history and any outstanding debts. The most widely used credit scoring model is the FICO score, which ranges from 300 to 850.

Your credit score is determined by factors such as your payment history, credit utilization, length of credit history, credit mix, and new credit. Payment history is the most important factor, as it reflects whether you’ve paid your bills on time in the past.

FACTORS THAT CALCULATE A PERSON’S CREDIT SCORE INCLUDE:

  • Payment history: This is the most important factor in determining a credit score, as it reflects whether an individual has paid their bills on time in the past.
  • Credit utilization: This refers to the amount of credit an individual is currently using compared to their total available credit. Higher credit utilization can lower a credit score.
  • Length of credit history: This takes into account how long an individual has had credit accounts and how recently they’ve been used.
  • Credit mix: This refers to the different types of credit an individual has, such as credit cards, loans, and mortgages.
  • New credit: This takes into account how often an individual applies for new credit and the impact it may have on their credit score.

UME PRO TIP: It’s best to make your minimum payment on time every month. We recommend paying as much of your balance off as you can afford, so you’re paying less interest in the long run, which saves U money. However, at the very minimum, do whatever you can to make that minimum payment by the due date. If you end up having extra money that you’d like to put towards your balance, you can make extra payments anytime. Just make sure you’re paying that minimum payment by the due date each and every month. In doing that, your credit score will improve and you will avoid paying any late fees. That’s a win/win for U!

As you have read, your credit score can have a significant impact on your financial life. You now know it’s used by lenders to determine whether to approve you for credit and at what interest rate. It’s important to monitor your credit score regularly and take steps to improve it if necessary, such as paying bills on time and keeping credit utilization low. Having an excellent budget foundation will help U keep your financial life in order with structure — check out our budget series here: 

Stay tuned to our blog next week to find out some common misconceptions about credit scores!

Have some questions about assessing your credit score? Drop us an email or give us a call today!

 


Disclaimer: U matter to Me (all of us) at UMe — and that’s why we do our best to deliver helpful information on our blog. Please note the following: (1) UMe Credit Union works hard to make certain that the information we post here is as accurate as humanly possible. But as you know, information can change and evolve quickly. While we try to update the blog on a regular basis, the content of some older posts may not be correct or up-to-date. (2) Some destinations on the World Wide Web that we link you to will exist on external websites. UMe Credit Union does not officially endorse any connected sites, nor do/did we compensate or get compensated by any entities to be featured in our posts (unless otherwise noted). (3) Everyone’s situation is unique and we advise you to consult with our personal bankers or your finance, tax, or legal professional for advice individualized to you!

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