A credit score is a key indicator of how well you manage your money. Understanding the basics, why they matter, and how to build your credit score are essential to establishing a secure financial future.
There are several financial entities and parties who rely on your credit score to help them decide how — or whether — to engage in business with you.
While several credit scoring models exist, the one created by the Fair Isaac® Corporation (FICO®) is the most commonly used to calculate credit scores. The FICO Score is used by 90% of the top U.S. lenders.*
Your score is typically a three-digit number calculated on several factors, including:
The first three factors are weighted the heaviest because lenders typically consider them the most reliable indicators of your ability to repay debt.
The last two — your credit mix and new credit — are not as important but can provide fiscal entities with insight into your financial life. Your credit mix is how many different types of credit you have (e.g., mortgage, credit card, auto loan, etc.). New credit is the frequency with which you apply for credit, which could reflect your financial pressures.
You can access your credit report free from the three major credit bureaus — Equifax, Experian and TransUnion — through Annual Credit Report.com. Each bureau is required to provide one free report every 12 months. While you can request all three reports simultaneously, you may want to consider staggering your requests so that you can check your score throughout the year. Periodically reviewing your report is important to understanding your credit health and checking for errors or indications of identity theft.
Here are four tips for building and improving your credit score.
Ensure you pay all your bills, including credit cards, mortgage, loans and utilities, on or before the due date. This simple act is the number one thing you can do to build your credit score. Late payments and defaults will negatively impact your score.
Credit utilization is the percentage of your available credit that you’re using and applies to revolving credit such as credit cards or lines of credit. A general rule of thumb is to keep your ratio below 30% of your credit limit. A higher percentage could signal to lenders that you have trouble repaying your loans and continue to float your balances from month to month. You can occasionally make purchases over 30% of your limit if you pay them off at the end of the period and do not turn them into long-term debt.
If you have little or no credit history, a secured credit card can help. These credit cards require a cash deposit as collateral, usually equal to your credit limit. While these cards seem similar to debit cards, the difference is that your payments are reported to consumer reporting agencies, which allows you to build a credit history.
If you have a family member or trusted friend with good credit, you can become an authorized user on his or her account. As an authorized user, you can make purchases with a credit card linked to that person’s account, piggybacking on the holder’s credit to build your own score. However, because the primary account holder will still be responsible for making payments, you’ll want to arrange a way to reimburse him or her for your charges.
Through these simple strategies, you can build your credit score and maintain a strong credit history, which will serve you well and enhance your financial well-being.
Looking for more help? Check out our helpful resources and calculators. Also, browse and watch our webinars for tips on money management and good financial stewardship for additional guidance in handling your financial resources wisely.
At GuideStone®, we want every servant of Christ to finish well. Our mission is to enhance the financial security and resilience of those who serve the Lord.
For more information, contact us at Info@GuideStone.org or 1-888-98-GUIDE (1-888-984-8433) Monday through Friday, 7 a.m. to 6 p.m. CT, to speak with a customer solutions specialist.
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