Understanding Your Credit Score

What it is, where it comes from, how it could impact you, and how you can improve it.

You’ve heard the term. Maybe you’ve seen your three-digit number. You know it’s important, but … what exactly is a credit score? Understanding where that number comes from is your first step to improving or maintaining your credit.

Key terms to know

Credit – When someone talks about your credit, what they are referring to is your credit history, i.e., how you have handled money in the past.

Credit Report – This is a summary of your credit history. It includes information like how many credit cards and loans you have, how much money you owe, whether you’ve ever declared bankruptcy and whether you pay your bills on time. There are three major credit bureaus that collect this information about you: TransUnion, Equifax and Experian.

Credit Score – This number is calculated based on the information in your credit report. Usually, your score will fall between 850 and 300. A higher score is good. It means you are considered less of a financial risk.

 Why your credit score matters

Your credit score can impact your ability to rent an apartment, buy a house, buy or lease a car, get insurance, take out a loan, or even get a job. It also helps determine the interest rate you will have on personal loans, home loans, credit cards and more. A low credit score can cost you money and opportunities in the long run.

What might be hurting credit score?

A lot of variables are used to calculate your credit score. Here are several:

• • • How many credit accounts you have. How many credit cards you have can be a good or bad thing depending on how you use them. Having multiple cards can give you a higher credit limit. But if you are carrying a lot of debt on your cards, it can hurt your score.
    • How long you have had those accounts. Your credit history builds over time. Newer accounts mean you have had less opportunity to show a pattern of positive financial behavior.
    • How close you are to your credit limit. Experts suggest keeping your balances at or below 30% of your credit limit. Maxing out your credit will hurt your score and can also leave you with debt you are unable to pay.
    • How often payments have been late. Making timely payments is one of the most important things you can do to maintain good credit.
    • How recently you have asked for new credit. When you apply for a new credit card or loan, your credit score will be checked. This “hard inquiry” can cause a small temporary drop in your credit score. Applying for a lot of new credit at once can hurt your score.

 How to improve your credit score

Remember, your credit history takes time to establish. Through consistent good habits, you can improve it. And there are choices you can make today that will help. Here are a few ways you can work toward improving your credit score:

• • • Make payments on time. This is key. You can set up automatic payments to ensure you are always paying your minimum balance. But remember, you still need to go into your account regularly to pay more than your minimum. That’s because you need to …
      
    • Repay debt. Accruing a lot of debt on credit cards and not repaying it will hurt your score. It can also trap you in a cycle of debt. Plus, carrying a balance from month to month means you will be paying more in interest. That can get expensive fast. If you have a lot of debt, it may take time to repay it. Make a budget to help you avoid new debt and plan how to begin paying back the debt you already have.
      
    • Only apply for the credit you need. It can be tempting to sign up for new credit cards to get a discount or other benefit. Avoid signing up for cards you don’t plan to keep. Opening new cards can cause a dip in your credit. Canceling cards can, too, because it lowers your overall credit limit.
      
    • Check your credit report. Errors do happen. You can request your credit report for free from the three major credit bureaus They are required to give you a free copy once every 12 months and give you a chance to fix any mistakes. Make sure the information in the report is accurate and up to date. Checking your reports annually also helps you monitor for identity theft.
      
    • Freezing your credit. If you are worried someone is using your credit without your permission — for example, if your information was compromised in a data breach or if you suspect an identity thief — you can place a freeze on your credit report. It limits who can see your credit history, making it harder for someone to open accounts in your name. A credit freeze will not impact your credit score, though you’ll have to lift it before you apply for any new credit.

 Heritage Bank was founded to promote the prosperity of local people and businesses. Our bankers want to help you meet your goals. If you have questions about loans, interest rates, or how your credit score may be impacting them, stop by your nearest branch or give us a call.

Heritage Bank. Member FDIC.