Credit Score 101

People want to know how to establish credit and a credit score. Your credit score is a number that reflects the information in your credit report. They want to know what a good credit score is, as well as how to build a good credit score. A credit score can play into your approval for a loan and it affects the interest rate on a loan. A person can easily qualify for a loan with a good credit score. A good credit score is a reflection of your credit worthiness. Your credit score can affect the amount you can borrow as well as the interest rate on the loan. Your credit report is a record of your credit history. Your credit score can change, depending upon how your history with credit changes.

90% of all lenders utilize a FICO credit score. The FICO credit score, which is the credit score created by the Fair Isaac Corporation, is used by most lenders to help them make credit related decisions.

Credit scores have a range of 350 to 850 points. That is a wide range of 500 points. So what is a good credit score? It depends upon who you talk to, but a good credit score would range from 700-749 points. A very good credit score would range from 750 to 799 points and a score greater than 800 would be excellent. 20% of borrowers have a credit score greater than 800 and 25% of borrowers have a credit score between 740 and 799. If your credit score is below 700 points , it does not mean you will not get a loan, but you may not get the same interest rates and terms as an individual who has a credit score greater than 800 points.

It's important to know how FICO creates your credit score. Payment history, the ratio of the amount of debt to available credit, length of credit history, amount of new credit, and your mix of credit is used to determine your credit score.

• Payment History – Do you pay all your debt payments on time, every time? This criteria makes up 35% of your credit score. That tells you how important it is to pay your loans on time. Pay your loans and credit cards on time. Set up automatic payments out of your checking account. If you have a credit card, pay your bill as soon as you receive it. You can go online with the credit card company and set up you payment and you can set the date to pay the credit card bill. The best would be to pay the credit card bill in full.
• The amount owed compared to available credit – Another criteria that plays a part of your credit score is the amount of credit owed compared to the amount of available credit. This criteria makes up 30% of your credit score. On your credit cards, keep your credit card balances below 30% of your credit limit. For example, if you have a credit card that has a credit limit of $5,000.00, don’t let the balance on the credit card get over $1,500.00.
• Length of credit history – The length of credit history makes up 15% of your credit score. How long you've had the account open affects your score. The longer you have an account open the better. If you have a car loan, pay off the loan balance over the full term of the loan. 
• Amount of new credit – Another criteria is the amount of new credit. Have you opened several new credit accounts? Retail stores are always offering discounts if you open a new account with them. It really isn’t worth it. It will complicate your life because you need to keep track of more credit cards to make your payments on time and it does not build your credit score.
•  Mix of credit – Having a mix of credit affects your credit score. A good mix of credit would include a credit card, home loan, and car loan. Don’t have too much of these types of credit, it can push your personal budget to pay your bills on time.

So how can you build your credit score? It takes about a year to generate a credit score and it takes many years of smart credit use to get a very good or excellent credit score. Here are 7 ways to build a good credit score:

1. Borrow only what you can afford to repay. You don’t want to spend over 38% of your gross income on debt. That includes your house, credit cards, auto loans and student loans.
2. Make all your payments on time, every time.
3. Pay your credit card balances in full.
4. Start with one credit card and keep track of what you charge to the card so you don’t have a big surprise when the credit card bill arrives.
5. If you carry a balance on your credit card, make a plan and pay more than the minimum payment and make a plan to pay the balance off as quickly as possible.
6. Use only a small amount of the credit you have available, especially credit cards. When you get the credit card balance close to the credit limit on the card that can adversely affect your credit score.
7. Keep your credit account open so it can age. That means if you have a loan, keep it open.

With the information and knowledge on how to build your credit score and demonstrate your credit worthiness, it still is each person’s responsibility to be wise with credit. Just because you can qualify for several credit cards and loans, you need know your capacity to repay your debt. Plan and budget for your living expenses and don’t run up a bunch of credit card debt. Too much debt can cause you to panic and make a bad financial decision that would adversely affect your credit score. Be responsible and wise with credit and you will have a strong credit score.

David Lantz
Senior Vice President
DavidL@frontierbk.com
Phone: 712-441-4348