Love Your Credit: Understanding & Improving Your Credit Score

Jessica Quindlen: [00:00:00] Welcome back to the Sound Cents podcast. I'm Jessica Quindlen. Today we're discussing loving your credit, understanding and improving your credit score. I have with us today two of our community education leads, Laura Straub and Sara Bickers.

Laura Straub: Hey.

Sara Bickers: Hi.

Jessica Quindlen: Welcome. Let's dive right in. What exactly is a credit score and how is it calculated?

Sara Bickers: Your credit score is a number that's going to be used by financial institutions and other service providers. Providers to determine their risk level when issuing a loan, credit or a service. Essentially, they want to know, are you going to pay back the financial contract that you might be entering into, be it money you're borrowing or if you're renting an apartment, pay your rent, things like that. So, your credit score is calculated based on previous credit behavior.

If you have credit cards or loans, are you paying them back? Are you paying them on time? Keeping to those contracts, managing them well. Because of this, your credit score can impact a lot of different areas of your life. It's [00:01:00] not just loans and credit cards, it might impact what you're paying for utilities, insurance, your cell phone, where you rent, where you live, and some career options as well. Your credit can impact a lot of different areas of your life.

Jessica Quindlen: Wow, alright. What do the different credit score ranges mean and how does knowing your credit score range help you?

Laura Straub: Yeah. There are two main credit ranges, FICO and Vantage. Now these two different scoring models, they also, not to get more complicated, but they also have different versions.

So, it's really important that you more focus on that range that you're falling into rather than the specific number because it can be so different based on those different algorithms that they're utilizing.

Now, FICO and Vantage, they both break it down into those ranges: poor, fair, good, very good and exceptional. Now, knowing where we fall on that range can help us determine if we're going to [00:02:00] get those best market rates out there and the likelihood of getting approved for those loans, credit or any other services. On both FICO and Vantage the very good and exceptional, that is considered A+. That's what we're aiming for is A+ credit.

There isn't really any difference between the very good and exceptional. Once you're in A+ credit, you're in A+ credit, it's just extra points. Especially for those of us who, when we went to school, we wanted that 100%, right? 100% is that A+ credit. So that's what you're going for. Anything above that is just that extra room for error.

Now, if we find ourselves in the poor or fair ranges, we can absolutely work our way up and it just will take some time and some discipline to get it done. We'll talk through that a little bit later, but just know, even if you're in those ranges, it's okay. We can help get you out of there.

Jessica Quindlen: Fantastic. What are the main factors that affect your credit score and which has the [00:03:00] most significant impact?

Sara Bickers: For the most part, there are five main categories that will affect your credit score. They’re your payment history, your utilization, (we'll expand more on what that means here in a second) your length of credit, your mix of credit and new credit.

If you're looking at your Vantage score, a Vantage score actually splits them up into six categories. But the same credit behavior that's going to help you with those five categories in FICO will also help you with those six categories in Vantage. They just look at the utilization pieces separately where FICO puts them together.

For the ones that have the most significant impact, it's going to be those first two that I named, your payment history and your utilization. Let's start with payment history. Payment history shows that we're making our payments and we're making them on time. If you’ve done that with past credit that you've managed, it is a great predictor that you might do that in the future, and that's why it matters. It impacts our credit score the most.

With these payments, we want to make sure that if we have a credit card, if we have a loan, we're paying them in full to what we've [00:04:00] agreed and paying them on time. Now, if you miss your due date by a few days, don't panic. You might pay some late fees, but it'll probably be okay. It's not reported to the credit bureaus that you're delinquent until you're 30 days past your due date, so you have a bit of a grace period there before it starts to impact your credit score. Once you hit that 30-day mark, it reports to the credit bureaus that you're late.

It can a pretty notable negative impact on your credit score being that late, so try to communicate with them what's going on if you know you're going to be late ahead of time so you can work something out, so it doesn't impact your score. And then note that the longer it is late, so in increments of 30 days, the more it will negatively impact your credit score that you've missed a payment.

Laura Straub: Yeah, so the next piece is that utilization. Utilization is how much of our credit with revolving credit are we utilizing. So that's our credit lines and credit cards. We want to be using those, but not too much. The rule of thumb is to stay below [00:05:00] 30 percent utilization of your revolving credit.

If we have a $1,000 credit line, we want to stay below that $300 mark that's being reported. Now, we can use it more often, we just need to make payments more frequently to lower that balance that's being reported at the end of your credit cycle, (that 30-day period) and that can help you.

But again, if you're saying below that 30 percent utilization, you're going to be building credit. Now, if you go over 50 percent utilization, that is when we start negatively impacting our credit in this category. It's just important to know what our credit limits are so we can figure out that good rule of thumb of staying below for that reported balance.

Sara Bickers: One thing I will add on, Laura, is that it's helpful to know that it's both your overall limit and that per line.

Jessica Quindlen: Yes. That was going to be my question. Maybe I have $60,000 across all my stuff [credit lines], is it 30 percent of the $60,000? Or if I have this tiny card, do I need to make sure that [00:06:00] one also stays below [30 percent utilization]?

Sara Bickers: Both.

Jessica Quindlen: So, what would you recommend if someone finds themselves in a situation where most of their credit cards are at zero, but they’ve got one big one with a significant balance? Let’s say they had to buy all new furniture or cover a major expense. What advice would you give to someone whose balance on that card might be 30 percent over their limit or represents 75 percent of their available credit on that particular card?

Is there anything you would recommend? Of course, pay it regularly, but is there anything they can do to help with that utilization?

Laura Straub: Unfortunately, not if you already are in that situation. Just making those payments and getting it down will really help you. We could go down the rabbit hole of balance transfer or things like that, but that's a whole mess.

But in the future, what someone could do is just split those purchases up and spread out across the different credit cards, so you are staying below that 30 percent utilization. But again, keep in mind, this is only one part of our credit score. Yes, it is a big part of our credit score, but [00:07:00] if you're keeping your payment history really awesome and doing really well in these other categories, you probably won't see that big of a dip anyway.

It'll work its way back up once that line is lowered every month, so there is hope for that. So don't worry if that's your situation, just know going forward, maybe do the love seat on this card and the other couch on that card.

Jessica Quindlen: I get that. So how can someone improve their credit score? And how long does it typically take to actually see these improvements reflected in their credit score?

Laura Straub: People can improve their credit by focusing on payment history and utilization, as those two biggest parts of our credit score. So, if we're making our payments on time and we're keeping that utilization low, we're going to see your credit improve. Now it'll maybe take a few months to really see a significant change, but just be patient and consistent and you will see that credit move up bit by bit.

There are some other ways that we can look into it. [00:08:00] We can get really personal with you and help answer that very specifically for you. We have our financial coaches that can help look at your credit makeup and what's happening and maybe it's a different category like new credit or that mix of credit that might help you.

So they can look through that. They will help you use a tool called SavvyMoney and anyone can do it. If you go to Ent.com/YourCredit you'll be able to see your credit score as well as those five different categories that we were talking about, and it's going to give you a letter grade for those categories.

So, you can see “Oh, my payment history is at a B right now. How can I improve this?” Sometimes it will just take time for it to come off. Other times it will be just making sure we're getting the payment due date on time if we're just consistently late on it or figuring out what else we need to do. It's a really helpful little tool to just see, snapshot what's going on and how to make those improvements.

Jessica Quindlen: Great. What are some [00:09:00] misconceptions about credit scores?

Sara Bickers: There are a lot of myths out there, aren't there? A few that we'd like to talk to.

One is that some people might say that you don't need the credit score or credit at all. That might work for some people, but for a lot of people—especially if you're renting, looking for certain jobs, or if you're someone who gets a job, internet, and insurance—it might be helpful to have a credit score that you manage well, as that can influence how much you pay for some of those products.

Being responsible with your credit cards is one way to build credit for free. By being responsible, we mean paying off those credit cards in full by the due date, so that way you're not paying interest. It's not becoming something that's becoming a burden. You're using tool to build credit. And so just managing your credit well to build your credit can help you in a lot of different areas of life.

Another myth is that you need to leave a balance on your credit cards to build credit. Laura just talked a bit about that utilization piece. This [00:10:00] is what we're talking about here. And the really important part is what's being reported to the credit bureaus for your credit card. If you have a credit card, you can reach out to the issuer to check when they report information to the credit bureaus. Find out when your balance is being reported and ensure that amount is ideally below 30 percent utilization, if not a little lower.

They say people with the highest credit scores typically have utilization rates between one and seven percent, depending on the exact scoring model—but it's pretty low overall. The key is to avoid carrying high balances on your credit cards. Additionally, you can pay off your balance in full before the due date to avoid interest and build credit for free.

Another myth is that you need an 800+ credit score. That can be a great goal to have more room for error or great bragging rights, but with the FICO scoring model, once you hit 740 and [00:11:00] up, you have that A+ credit, you're getting the best rates, you're getting approved for anything reasonable you're asking for.

And then the last myth that we want to talk to is that checking your credit score hurts it. There's a difference between hard hits and soft hits to your credit score. A hard hit is an application for credit. You're applying for a credit card, you're applying for a car loan, something along those lines.

Soft hits will show up on your credit report, but they don't impact your score. So that's you, yourself checking your credit score on SavvyMoney or Credit Karma or one of the other sites. Oftentimes, if a job checks your credit score, that'll be a soft hit. With apartments, it's always worth asking them, is this a soft hit or a hard hit. Some apartments do run hard hits on your credit, so double check, so that you know whether or not it's going to be a hard or a soft hit.

Laura Straub: Yeah, it's always nice to get that ahead of time, so you know “Oh, okay, maybe I'm not going to apply for five different apartments, I'll stick to one and then go from there.” Especially if they're all going to do a hard hit.

Jessica Quindlen: What tools are available to help [00:12:00] monitor and improve your credit score?

Laura Straub: We mentioned a few before but Ent.com/YourCredit is a great tool for you to check your credit score, you can monitor things. Many credit card companies also have a credit monitoring tool for you, so check the resources that may be already provided to you. Oftentimes you hear about the ones like CreditWise and Credit Karma. Again, oftentimes credit card companies offer that for free for you, so just check what you have out there. But if you can't find one feel free to use ours. Again, it's Ent.com/YourCredit.

Now, when we want to pull our credit report though, AnnualCreditReport.com is a fabulous resource for us to pull our credit reports. This does not show our credit score, but it shows our report, so it's everything that's in there being reported to us. So, all our loans or credit cards, et cetera, should be accurately posted on there.

And we just want to check to make sure that activity is indeed [00:13:00] yours. Ideally, we should be pulling our credit reports at least three times throughout the year through the three different bureaus, but we can do it more often than that now.

Feel free to do that as your homework tonight to pull your credit report from the bureaus and just check to make sure all of that information is indeed yours.

Jessica Quindlen: I love that. All right. So how can listeners start improving their credit score today?

Sara Bickers: We'd recommend starting with those two big categories: your payment history and your utilization. To the best of your ability, make sure you're making your payments and making them on time. If you're struggling with that, we do have financial coaches that can help you come with some plans to navigate that or reach out to your creditors and have that conversation with them.

And then that utilization piece as well. If you have high balances on your card, work toward paying them down. And if you're looking for best ways to manage those cards, make sure we're keeping those balances low, as low as possible. And then to maximize our ability to build credit, pay them off before those due dates in full. Would you add anything Laura?

Laura Straub: No, if you stick to [00:14:00] those two big things, you really will see your credit go up or stay status quo if you're already in very good, excellent credit status.

Jessica Quindlen: Fantastic. That brings us to the end of our show. Sara, Laura, thanks so much for being here. It was great having you.

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Jessica Quindlen: Thank you for listening to Sound Cents from Ent Credit Union. Be sure to follow our podcast as well as rate and review us. I'm Jessica Quindlen. I will see you in two weeks. Same time, same place.