Credit

Credit scores: A digital finger on your financial pulse

Like blood pressure readings can provide a basic indication of your heart health, your credit score can deliver a reflection of your overall financial health. Your score shows your creditworthiness and can have a big impact on your finances.

Why do credit scores matter?
When it’s time to get that new car (and a new loan), a credit card, etc., lenders use your score to determine the risk you represent as a borrower. A good credit score shows that you are financially responsible and means you’ll have an easier time securing loans and other services than someone with a low credit score. In essence, your credit score is a barometer of your ability to pay bills on time and responsibly use various forms of credit.

How are scores calculated?

People unfamiliar with the credit-scoring process may think that credit scores are developed using a super-secret formula, but that’s not the case. The most commonly used credit scores use a method called FICO and are developed by three primary credit reporting agencies: Equifax, Experian and TransUnion.

These agencies receive information from creditors about your payment history on:

  • Auto loans
  • Mortgages
  • Credit accounts
  • Home equity loans
  • Insurance, utilities and other accounts that require payment

This data is then compiled and analyzed to create your credit score, which ranges from 300 to 850 for the FICO method. Here’s how scores are commonly categorized:

  • Bad credit scores range from 300-560
  • Fair credit scores range from 560-660
  • Good credit scores range from 660-725
  • Very good credit scores range from 725-760
  • Excellent credit scores range from 760-850

How are credit scores used?
Although the formulation of your score is computerized, the decision to grant or deny loans still rests in the hands of lenders. The score serves as a tool to help institutions like your credit union determine whether you’re likely to pay that new home equity loan on time each month.

If you want to improve your chances of securing loans or obtaining other payment-driven services, you have the ability to up your credit score.

How to improve credit scores.

To improve your score, pay attention to the factors that go into it. Be mindful of:

  • Making payments on time
  • The type of credit that you use (more variety is better)
  • The amounts you owe (ratio of available credit to what you owe is important)
  • The length of your credit history (longer is better)
  • New credit accounts and applications (a lot of new accounts in a short period of time could affect you negatively)
  • Events such as bankruptcies and foreclosures

If you keep an eye on these factors, it’s possible to improve your score over time. Also, you could ask your credit union about alternatives to traditional loans, like a share secured loan or share certificate secured loan. Loans like this use your own funds as collateral pledged for the loan – and could be a good way to help build or rebuild credit.

How to get your credit report.

You can find your financial credit history and the factors that comprise your credit score in your credit report, which you can receive free annually from each of the three aforementioned reporting agencies (visit annualcreditreport.com for more information). Your credit score is an additional cost of roughly $10, a fee well worth the knowledge of your credit health.

For more information or answers to your credit questions, contact Member Services at 402-292-8000 or memberservice@sacfcu.com. Or, you can request more information here.

The building blocks of credit e-book

Author SAC FCU Managing Editor

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