Understanding Your Credit Score

Jan 2022 | Featured, Financial Education

What is a credit score? How do I build credit? What’s considered a good score?

If you have asked these questions, you are not alone. Credit scores can be a confusing concept for many, but it is important that you know how it is calculated and the impact it can have on your financial future.

What is a Credit Score?

We all have a credit score, and that three-digit number can have a large impact on our financial lives. Potential lenders, landlords, and even employers look at your credit score as a way to determine how trustworthy you are with paying back debts.

How is my credit score calculated?

There are five factors that go into calculating your credit score. Each have different weight that impacts your score in different ways. The five factors are:

1. Payment History

Making on time payments has the largest impact on credit score. About 35% of your score is comprised of your payment history.

The easiest way to improve this portion of your score is to ensure you are making at least the minimum payments on time.

Tip: Schedule your payments in advance or setup automatic bill pay to ensure you never miss a payment!

 

2. Credit Usage or Credit to Limit Ratio

Another large impact on your credit score is credit usage, which makes up about 30% of your score. If you have credit cards, you want to keep your spending to about 30% of your total limit each statement. That means that if your limit is $5,000, try to keep your balance below $1,500.

Tip: If this is a challenge, you can try to increase the limit on your existing credit card(s). However, be careful to not increase your spending, and keep in mind this will likely require a hard pull into your credit which will have a negative impact on your score.

 

3. Age of Credit

This makes up about 15% of your credit score. The age of credit is determined by both the average age of all accounts and the age of your oldest account.

This factor can be a challenge for people beginning on their credit journey. Credit younger than 2 years old is below average, while over 25 years old is considered excellent.

Tip: Open a credit card as a young adult to start building credit early on and do not close old credit cards, even if you don’t use them anymore. Even if you have to pay a small yearly fee, it is worth it to increase the age of your credit.

 

4. Account Mix

Having different types of credit can have a positive impact on your score as well. Having a mix of credit cards, personal loans, auto loans, and mortgages will increase this score.

 

5. Credit Inquiries or New Credit

Each time you apply for a new loan or credit card, the lender conducts a “hard pull” inquiry on your credit score, which has a negative impact on your score. Be careful with how many new accounts you open in a year and try to limit yourself to no more than three hard inquiries a year.

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How do I check my credit score?

There are two types of inquiries into your credit. The first is called a “hard pull” which is most commonly done by lenders to approve you for a new loan – including a new credit card.  This type of inquiry has a negative impact on your credit score, so be cautious about applying for new credit frequently. Home rental applications often conduct a hard pull as well.

The second type of inquiry is called a “soft pull”. This credit report pull includes checking your scores, pre-qualified loan and credit card offers, and often background checks conducted by an employer. A soft pull has no impact on your credit but is also not completely accurate and may display a slightly different number than a hard pull.

There are three agencies that report credit: Experian, Equifax, and TransUnion. You receive a free credit report from each of these agencies yearly.

 

How do I build or repair credit?

    1. Check your credit score. First step to healthy credit is to see where you currently are. Utilize your annual free credit check from one of the three reporting agencies.
    2. Pay on time. Maintaining your existing accounts is one of the best ways to build credit. Ensure you are making on-time payments and keeping credit card usage to 30% or less of your limit.
    3. Consider taking out a loan. Alaska Air Group Credit Union has specific Credit Builder Loans to help build new or repair damaged credit. However, don’t take out another loan if you have recently opened one or if you are struggling to make on time payments with your existing accounts. Also, try to limit your new loans and credit cards to no more than three new accounts a year.
    4. Keep learning. Find lots of articles about credit scores, loans, and credit cards through Banzai, our free financial wellness tool.
    5. Start with these virtual coaches to learn how to build credit or repair bad credit.

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