Financial Literacy: Understanding Your Credit
Understanding how your credit score and credit report affect your financial life seems complicated. Luckily, it doesn’t have to be, and by knowing how credit works and how you can use it to your advantage, you’ll be ready to make good financial decisions in the future.
A credit score is the three-digit score, between 300 – 850, which is designed to represent your credit risk, or the likelihood you will pay back the money borrowed from a financial institution. A high score represents a higher likelihood of responsible financial habits and puts the bank or credit union you’re borrowing from at ease. If your credit score is on the lower end, you’re not automatically denied as there many different factors to consider. However, working to improve your score is always a good idea and we have certified Financial Coaches as Ascentra who can help.
Your score is calculated through three nationwide credit bureaus, Equifax, Experian, and TransUnion. Your current and past creditors/lenders periodically give reports on your loan agreements to these bureaus over the life of the loan. Each bureau applies this information to their method for calculating your score. Their methods may differ, but they use the following common factors in their calculations:
- How many accounts you have open
- What types of accounts you have open
- Used credit versus your available credit
- Your credit history
- Your payment history
If you look at your score from each bureau, you may see three different scores. Don’t be concerned, this could mean that your creditors and lenders just didn’t send a status report to all three credit bureaus. Some will only send to one or two of them.
Credit scores are used in all facets of lending. Your credit score determines your creditworthiness to the lender and the risk they may incur. It helps them decide on which type of loan you are eligible for and what interest rate you will receive. A higher credit score indicates less risk for the lender, resulting in lower interest rates and payments for you. This applies to loan types such as mortgages, auto loans, lines of credit, personal loans, credit cards and more.
Additional information about your credit portfolio and history is collected in your credit report. This is a summary of your credit history that is sent to the credit bureaus by your lenders and creditors. It contains personal information that paints a picture of how well you’ve managed your credit in the past and helps show financials what they could expect in the future. This includes information about your credit accounts such as, credit cards, mortgages, student loans, auto loans and their payment history and trends. The report is used along with your credit score to determine your creditworthiness.
This information stays on your credit report for extended lengths of time depending on whether it’s positive or negative. Positive information usually stays on your report for a longer period. This means that on an account where there are no infractions, and you paid your loan per the loan agreement that the information could remain on your report for up to 10 years following the last update from the lender. Negative information like defaults or late payments can stay on a report for up to seven years with bankruptcy staying for up to 10 years.
There are several products and services on the market to help you monitor and manage your credit score and report. But as a member of Ascentra Credit Union, you have a great service already available to you through Digital Banking called SavvyMoney. Enroll by logging into Digital Banking, then click on the SavvyMoney widget to the right of your account information. Follow the steps to enroll and you will instantly have access to important information regarding your credit score and report. This includes your current score which can be updated every 24 hours. This process is considered a soft pull of information, so it won’t impact the score in any way.
SavvyMoney also gives you detailed information about your credit such as a score analysis that considers your credit rating, history, usage, mix of accounts, age, and inquiries. In addition, a detailed credit report, score simulator, alerts and custom loan offers are also available to help you make good decisions in the future.
Using this service to manage and maintain your credit information will open more opportunities for borrowing when it comes to home, auto, and personal loans and will help you make better decisions about what loans are available to you and the rates you should expect to qualify for when applying.