Did you know your credit score could be costing you thousands of dollars without you even realizing it?

I’m Alvaro and in this video I’m going to go over what makes up your credit score… what hurts it… how to improve it… and how it can affect your finances.

Let’s start with the basics.

What actually makes up your credit score?

A credit score is a number between 300-to-850… given to a borrower… that gives lenders an idea of how much they can trust a debt to be repaid.

It's used when you apply for a mortgage, car loan or credit card… but it goes much further beyond lending… which I’ll explain later.

There are five key factors that determine your score:

• Payment history
• Credit usage
• Credit age
• Mix of credit
• And hard inquiries.

Now…your “payment history” is the biggest factor… making up 40-percent of the score.

This measures your on-time payments and any late or unpaid payments… regardless of the amount.

One missed payment can take two years to recover from… but recent payments matter more than older ones.

Once a debt is paid off or negative information is reported… it can stay on your credit report for seven-to-ten years.

Next… we have “credit usage” which makes up 23-percent of your score.

It measures how much of your available credit you’re using. 

Most experts say to stay below 30-percent usage.  This means if you have nine-thousand dollars of credit available to you, try to use three thousand or less.

If you max out your credit lines… your score will likely drop.

The next factor is your “credit age.”

It is the average of all open credit lines you have… and makes up 21-percent of your credit score.

Closing out long-standing accounts… or opening too many new ones will lower your overall average which in turn… can lower your score.

Moving onto your “mix of credit.”

This affects 11-percent of your score… and is based on the type of credit lines you have open.

The two most common are installment and revolving credit.

Installment loans are like mortgages or car loans… where you have a set payment amount for a specific length of time before it’s paid off. Such as a twenty-year mortgage or a car loan for 48 months.

Revolving loans are like credit cards or lines of credit… where you can add debt at any time and there’s not a set payoff date.

Having a mix of installment and revolving credit types is better for your score.

The last factor which makes up five-percent of your score is “hard inquiries”.

A hard inquiry is when a creditor checks your credit report because you have applied for a new credit line. 

Each hard inquiry will negatively affect your score…  regardless whether you are approved or not.

There is also what’s known as a soft inquiry… which does not hurt your credit. 

A soft inquiry is often used by landlords, insurance companies or potential employers to review your credit report… without actually applying for credit.

Now, let’s do a quick recap of what makes up your score:

Payment history is 40-percent

Credit usage is 23-percent

Credit age is 21-percent

Mix of credit is 11-percent

And hard inquiries make up the last five-percent.

Now that we know what makes up your credit and some actions that can hurt it… let’s answer the question: How do you improve it?

If you are just starting out and need to establish credit… you can apply for a low-interest rate credit card through a credit union.

Use that for small purchases like groceries or gas… and pay it off each month.

This shows creditors that you can be trusted to not over-spend and make your payments on time.

Paying it off in full… also saves you money by limiting the amount of interest that accrues.

If you need to repair or improve your credit… look into free financial coaching.

Ascentra credit union offers coaching services at all nine branches…

This service is even offered in spanish.

Our coaches do a soft-inquiry on your credit… so it doesn’t affect your score… then walk through the report to create a custom action plan.

Our coaches can also help with budgeting, debt reduction, long-term financial planning and more.

You can also use credit monitoring tools like savvy-money on the Ascentra app.

It allows members to view their credit report… and shows them where they’re doing well, where they can improve… and how.  This free service to ascentra members, has so much more to offer beyond

Don’t pay for credit services… and be aware of the fine print… you never know, some of these service could sell your information to third-parties.

Annual-credit-report-dot-com allows you to pull a full report once a year from each of the three credit reporting agencies… Transunion, Equifax and Experian.

Make sure to check for any inaccuracies… and if you find any… report them to the relevant credit bureau so they can be removed and not counted against you.

Consolidation loans through your credit union can help you in a number of different ways.

Consolidation let’s you combine multiple loans and/or credit card payments into one… offering a lower interest rate… helping you build your credit and save money.

Consolidations improve your payment history because one payment is easier to keep track of and pay on time… rather than several due dates throughout the month.

It helps your mix of credit by moving revolving credit to installment credit… and improves your credit usage by freeing up the credit lines the debt is moved from.

But it’s important to not use those credit lines again and go further into debt… fight any urge to use them by not carrying them around in your purse or wallet…just be sure to keep them in a safe place in your home… and remember that closing them will hurt your credit usage and your credit age.

Improvements should show on your credit report within a month or so…
and remember… more recent positive changes are much more important than negative impacts from the past.  Let’s look at a timeline that gives us the appoximate credit weight for each year. Because what you have done lately - both good and bad, carries more weight. 

Here's the break it down….40-percent of your score is based on what you’ve done in the past year… 30-percent is based on the prior 13-to-24 months and 20-percent on the prior 25-36 months.

That means 90-percent of your score is graded off of the past three years.

There’s no instant-fix to repairing your credit score… but with a little patience and work, mixed with some guidance… you can do it. 

But why should you do it?

Improving your score can make a big difference on your finances. 

Let’s say you’re looking to rent an apartment and the landlord conducts checks credit.

They may offer it to the person with the higher score… giving you less options for housing.

When you apply for a loan… a good credit score not only helps determine if you get approved… but also what interest rate you’ll get.

The higher the score you have typically means you’ll pay less in interest.

For something expensive like a mortgage… that can mean the difference of tens-of-thousands of dollars… say you plan on buying a home for 250 thousand-dollars and a bank promoting a 5.75% interest rate says you can qualify, but since you are not in the top credit bracket, your interest rate will go up to 6.75%. 

This is refered to as a “loan level price adjustment” – a policy that many lenders use that raises your interest rate or charges more fees.  Side note: ascenta does not punish people with “loan level price adjustments” on fixed rate mortgages– if you qualify for a mortgage, you get the best rate. 

Now, one percent may not sound like a lot, until you do the math.  For this example we will use the online caculator that lets you compare two mortgages.  We will keep it simple and not include closing costs and fees, and real quickly we see for a 30 year loan, that one-percent rate bump will cost you over 58-thousand dollars in the life of the loan. 

Imagine saving about 160 dollars every month for 30 years!!

Now, low credit scores can also increase your auto insurance premiums by as much as double the cost.

Research shows drivers with lower credit scores statistically have a greater likelihood of filing claims… which leads to higher rates.

(https://www.allstate.com/resources/car-insurance/does-credit-score-affect-car-insurance)

Essentially…  having a good credit score helps save you money… but it can also help you earn money.

Some employers do a soft inquiry of your credit before offering you a position…

So if you don’t have good credit… you could be limiting your job opportunities and the pay that comes with them.

(https://money.cnn.com/2013/08/12/pf/bad-credit/)

While your score can impact your earning potential… it’s important to know that how much you earn does not affect your credit…

Here are other factors that do not affect your credit score. 

A debt-to-income ratio compares how much money is coming in to what’s going out towards paying debt… and is one of the most common misconceptions about credit score influence.

There are many people that make a lot of money and have bad credit… and people who don’t make much money… living paycheck-to-paycheck… but have great credit.

The length of time you’ve worked at an employer… or how long you’ve been living somewhere also have no impact on your score.

all of these things may impact whether you qualify for a loan or how much a lender will offer… but have no bearing on your credit score.

Remember… the areas you want to focus on are your:

• Payment history
• Credit usage
• Credit age
• Mix of credit
• And hard inquiries.

Put in some time… some work… and remember… improving your credit score isn’t about perfection… it’s about progress…

And if you’re not sure where to start… ask for help.

Ascentra Credit Union is here to support you with tools, coaching and personalized guidance to help you reach your goals.

Your credit journey is just that… a journey… so take the first step… and keep moving forward.