Understanding Credit Scores: Tips for Improving and Maintaining a Healthy Credit Score

Simply put, a credit score is like a grade for how good you are at managing money. It is one of the most important tools that lenders and financial institutions use to assess the risk of lending money to you. A higher credit score indicates a healthy credit history; therefore, a lower credit risk, making you more appealing to potential creditors. Credit scores typically range from 300 to 850, with higher scores being better, indicating that you have consistently made payments on time to satisfy your credit obligations. While a "good" credit score varies based on the lender and the specifics of the loan request, it is typically around 700 or higher. Once your score is over 760, you may expect to be offered the best available rates. Credit agencies refresh scores once a month, but the exact timing of those updates may vary based on a myriad of factors.

You might be surprised to learn that you can have multiple different credit scores at the same time. Based on where the lender obtained their data (from one, two, or all three credit reporting agencies), the credit score model that is used, the lender’s own criteria for issuing credit, and the timing of when the score was produced. A hypothetical scenario for calculating a credit score might weigh the following factors this way:

• Payment History (35%): This is the most important part. It's like getting a gold star for paying bills on time. If you pay on time, your score goes up. If you miss payments, it goes down.
• Credit Utilization (30%): Imagine you have a money jar, and you use only a little bit of it. That's good for your score. But if you use a lot of it, it's not so good. This measures how much of your available credit you're using.
• Length of Credit History (15%): The longer you've had credit (like a credit card or loan), the better. It's like experience points. More experience means a higher score.
• Credit Mix (10%): Having different types of credit, like credit cards and loans, can be like having a diverse team. It's good for your score, but you don't need to have them all.
• New Credit (10%): Every time you apply for new credit, like a loan or a credit card, it can slightly lower your score. Too many applications at once can hurt your score.

Lenders will also look at other factors, such as your income, your assets, or how long you have been at your current job. Note that a high credit score isn’t the only sign of financial health. An individual who chooses to use cash or debit cards for major purchases rather than taking out loans will likely have a lower credit score than someone with a long record of multiple well-managed debts, even though they may be very financially responsible. 

• Getting Credit: When you need to borrow money, like for a credit card or a car loan, lenders look at your credit score. If it's high, they're more likely to say yes. Plus, you might get lower interest rates, which means you pay less in the long run.
• Interest Rates: A good credit score can mean lower interest rates on loans and credit cards. Lower interest rates save you money, so it's a win.
• Renting a Home: Landlords often check your credit score when you apply to rent an apartment. A good score can help you get the place you want.
• Utility Bills: Some companies might look at your credit score before deciding if you need to pay a deposit for things like electricity and water.
• Job Opportunities: Some jobs, especially those handling money, check your credit as part of the hiring process. A good credit score can make you more attractive to employers.

• Pay Bills on Time: Make sure you pay your bills by their due dates. Set up reminders or automatic payments to help you stay on track.
• Manage Credit Cards Wisely: Keep your credit card balances low compared to your credit limits. Aim to use less than 30% of your available credit. Pay off your credit card bills in full whenever you can.
• Mix Different Types of Credit: Having different types of credit, like credit cards, loans, and mortgages, can boost your score. Only open new credit when you really need it.
• Don't Close Old Accounts: The longer you've had credit, the better. So, avoid closing old credit card accounts, especially if they have high credit limits.
• Deal with Problems: If you have late payments or debts in collections on your credit report, work on fixing them. Pay off debts in collections and ask creditors to remove them, if possible.
• Ask for a Credit Limit Increase: If you've been good at paying your credit card bills, consider asking for a higher credit limit. Having a higher credit limit could reduce your total credit utilization, which can help your credit score.
• Be Careful with New Credit Inquiries and Too Many New Accounts: Every time you apply for new credit, it leaves a mark on your credit report. Too many marks can hurt your score, so be careful about applying for credit often. Likewise, opening lots of new credit accounts in a short time can worry lenders and lower your score. Only open new accounts when you need them.
• Check Your Credit Report Regularly: Dispute any errors you find in writing to all three credit bureaus. You’ll want to include the credit bureau’s dispute form as well as any supporting documentation and be sure to keep copies of everything you send. You can find sample letters and more information about how to file a credit dispute in this article from the Federal Trade Commission. 
• Stay Alert for Signs of Identity Theft: All the work you do to improve your credit score could be thwarted by someone who has stolen your personal identifying information to take out loans in your name. Review your credit report and watch for any signs of identity theft to ensure your credit score is impacted by only your own financial behavior. If you find evidence of identity fraud in your credit report, remember, we can help. All Fort Financial members are eligible for fully-managed identity fraud research, remediation and recovery services, performed by certified, licensed recovery advocates, if identity fraud is known or even suspected, to dispute fraudulent activity that might damage your credit standing. 

Young adults and those who have never had a need for credit may not want to go into debt but want to build their credit score. Here are a couple of ways that you can build your credit score without debt.

• Apply for a Credit Builder Loan from Fort Financial, which places the money you borrow into a savings account that you can claim after completing the loan term.
• Apply for a secured credit card, which gives you a line of credit that is backed by a cash deposit.