Credit score is a key factor in overall financial wellness.
A credit score provides a snapshot of how someone manages debt and credit. It influences nearly every major financial decision someone makes, from applying for loans and getting approved for them, securing lower interest rates on those loans and credit cards, and even being granted a lease!
A strong credit score reflects good financial habits and gives lenders an ideas of how reliably the borrower will pay down their debt. Understanding how credit scores work and how to maintain or improve them is essential for achieving long-term financial stability and flexibility.
What is a credit score?
A credit score is a number calculated by the ‘Big 3’ credit bureaus – Experian, Equifax, and TransUnion – that is based on the information included in one’s credit report. Items such as payment history, amounts owed and for how long, types of credit that have been granted, and any credit inquiries.
Responsible financial management, like paying bills on time, keeping credit card balances low, and maintaining long-standing accounts, help improve credit scores. These practices show lenders that the borrower is low-risk when it comes to lending them money. Negligent behaviors, like missing payments, carrying high balances, or opening too many accounts in a short period of time, will lower a credit score. Depending on the severity of misuse, those negative marks can remain on a report for up to a decade.
Credit Scores Typically Range from 300 to 850
300-579: Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Excellent
Why is a good credit score important?
A good credit score reflects responsible credit management. Lenders, landlords, insurance companies, and even some employers use credit scores to evaluate the financial reliability and risk of non-payment by applicants.
A high credit score will significantly improve the chances of being approved for a mortgage, car loan, or credit card. It also helps people qualify for better loan terms and lower interest rates, which can result in substantial savings over the life of a loan. Other benefits of a good credit score may include reduced insurance premiums, lower utility or rental deposits, or simplified rental application processes. When refinancing an existing loan or applying for new ones, the credit score will be a major factor in determining qualifications, including how much can be borrowed, interest rate, and payment terms.
Tips for Maintaining and Improving Your Credit Score
To maintain a strong credit score, keep performing those positive financial habits, such as the ones below.
1. Pay Bills on Time/Payment History – 35% of credit score
Avoid late or missed payments on loans, credit cards, and utility bills. This is the top reason on why someone’s credit score might be lower.
2. Keep Revolving Credit/Credit Card Balances Low – 30% of credit score
Pay down balances and use credit cards moderately to demonstrate responsible credit management. Experts recommend that total credit card balances should be kept at 30% or less.
3. Maintain Older Accounts/Length of Credit History – 15% of credit score
Experience with paying on and maintaining credit accounts strengthens your credit history and shows lenders a track record of consistent, responsible credit use.
4. Avoid Opening Multiple New Credit Accounts – 10% of credit score
Each new credit application triggers a hard inquiry into perceived credit worthiness. A hard inquiry is when a lender or financial institution checks a credit report during the approval process. Even one alerts lenders to the possibility of new debt, and several in a short period of time may give the perception of being a higher-risk borrower.
5. Vary Your Types of Credit Accounts – 10% of credit score
Number and types of credit are considered when determining a credit score. Having a mix of installment loans and credit cards can help improve a credit score.
Beware of Credit-Repair Scams
Credit repair services often make unrealistic promises and may even use unlawful or unethical methods that wind up leaving people in a worse position than they were.
Monitor Your Credit Report Regularly
Check your credit report regularly for any errors or fraudulent activity to avoid incorrect negative impacts on your credit score. Experts recommend at lease once a year, and more often if planning to make a major purpose, like a home or car.
Don’t navigate the complexities of credit and financial management alone! Kansas City Credit Union is dedicated to providing its members with personalized financial services. Take the first step toward a brighter financial future by exploring the benefits of KCCU membership. Visit your nearest Kansas City Credit Union branch to learn more or click here to start your application online today!
