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Credit 101: Tackling Frequently Asked Questions

Credit is important. However, if you’re feeling in the dark about what it is and how it works, you’re definitely not alone. According to a recent study conducted by NerdWallet and Harris Polls, most Americans don’t understand the basic ins and outs of credit.

Knowing how credit works and how it can affect you is an important step in the journey to achieving your financial goals. Not sure where to start? Check out our FAQ!

What is a Credit Score?

A credit score is a number between 300 and 850 that is calculated from an individual’s credit report and can play a significant role in how lenders assess your credit-worthiness, which is simply how trustworthy a financial institution or creditor determines you to be. For example, a strong credit score and history demonstrates to potential employers, utility companies, financial institutions and even landlords that you are a responsible person who pays their bills on time.

It’s important to note that each person has several different credit scores. Most notably, the three major credit rating agencies Experian, Equifax and TransUnion will each generate their own.

What Makes Up a Credit Score?

While information such as age, income, ethnicity and marital status don’t influence your credit score, five key factors will affect your score to varying degrees. They are:

  • Payment history (35 percent). You payment history takes into account how reliable you have been in making payments on time and if you have any payment delinquencies.
  • Credit utilization (30 percent). This factor measure how much you owe on your accounts and the amount of available credit used on your revolving accounts.
  • Length of credit history (15 percent). Your credit history is made up of how long accounts have been opened the length of time since credit cards were last used.
  • Types of credit used (10 percent). The mix of accounts you have, such as revolving and installment can play role in your credit score.
  • New credit (10 percent). This refers to your pursuit of new credit, including credit inquiries and the number of recently opened accounts.

What are the Benefits of a Good Credit Score?

Having a good credit score, which is considered to be 720 or higher, comes with several important benefits, including:

  • Increased credit card limits
  • Competitive mortgage and refinancing rates
  • Lower financing rates for loans and insurance
  • Excellent credit card deals
  • Leverage when negotiating with lenders

How Can a Poor Credit Score Affect Me?

Having a poor credit score, which is considered to be 620 or lower, can come with significant drawbacks, including:

  • Higher interest rates on credit cards and loans
  • Difficulty getting approved for a loan or credit card
  • Trouble getting approved for an apartment
  • Security deposits required for utilities
  • More expensive insurance premiums

How Can I Build Credit?

The key to building a good credit score is to avoid carrying a lot or debt and to create a borrowing history that demonstrates you are able to consistently pay your bills on time.

To start, set up automatic payments for fixed monthly bills, like cell phones or cable. This will not only make paying your bills easy, but will ensure you never miss a payment. If you are unable to set up an automatic payment, setting a reminder for when bills are due can also help.

Having a healthy relationship with credit is also important and having a credit card can help to bolster your credit score even if it’s only used minimally. If you don’t qualify for a traditional credit card, consider a secured credit card like the MCU Secured VISA® Credit Card, where you can obtain a credit line equal to the deposit you make, helping you to steadily improve your credit score.

My Credit Isn’t Great. How Can I Started to Rebuild it?

In addition to working towards creating a strong payment history, those with already damaged credit will have to work extra hard to show they can have a healthy relationship with credit. This means that paying down your debt is essential. Freezing your credit cards or using them only in emergencies is the first step.

Once you’ve taken on a new attitude towards using your credit card, you’ll need to set up a plan in which you can put a large piece of your budget towards your highest interest credit cards, while maintaining your other minimum payments will be the most effective step to minimizing your debt.

You can also consider consolidating your debt in order to pay it off more easily. However, It’s important to make sure the loan you are taking in order to consolidate your debts comes with decent rates and terms.

How Can I Check My Credit Score?

Before you look to an online service for your credit score, check your credit card and loan statements. Many major credit card companies and some auto loan companies have begun to provide credit scores for all their customers on a monthly basis.

However, checking your credit score isn’t enough. As a consumer, you’re entitled to a free copy of your credit report every 12 months from each of the three nationwide credit reporting companies Equifax, Experian and Transunion. You can order these reports online from annualcreditreport.com, which is the only authorized website for free credit reports, or call 1-877-322-8228. To receive your credit report, you will need to provide your name, address, social security number, and date of birth to verify your identity.

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