In today’s world, a credit score is one of the most important numbers you’ll encounter. Many of life’s big milestones, such as being approved for a home mortgage or auto loan, can be given a green or red light depending on your credit score. A credit score will determine if lenders approve or decline your application, the score will impact the terms of the loan, which could potentially mean you’ll pay more or less over the life of the loan.


What Is a Credit Score?

Your credit score is a rating that tells financial institutions how likely you are to repay debt. Scores range from 300 to 850 and fall into the categories of poor, fair, good, very good and excellent. Lenders view those with a high credit score as trustworthy and reliable.
 

What Can a Credit Score Do for You?

Think of your credit score as your financial report card. A higher score unlocks better interest rates and a higher likelihood of approval for loans, credit cards and even rental applications. It can also save you money over the long term as lower interest rates may equal lower payments. A lower score, however, usually leads to higher interest rates, which leads to declination of credit.
 

How Are Credit Scores Calculated?

Credit scores are based on many factors. If you can keep these variables in check, you’re on your way to a solid score!
  • Payment History (35%): On-time payments are the most important factor to maintaining a strong score. Enroll in auto pay or set calendar reminders to ensure you always pay ahead of your due date.
  • Amounts Owed (30%): Keeping balances low, ideally under 30% of your available credit. For example, if your credit limit is $1,000, try to keep your balance at or below $300 to stay within that 30% threshold.
  • Length of Credit History (15%): Older accounts help boost your score because trust builds over time.
  • Credit Mix (10%): A combination of credit types, such as loans and credit cards, show you can manage different types of loans.
  • New Credit (10%): Avoid opening too many accounts within a short period of time, as this can raise concerns about your financial stability.


How to Establish Credit

If you’re new to credit, try these strategies to establish a solid score:

Consider a Student or Retail Credit Card
If you qualify as a student or your favorite retailer offers a credit card, consider applying to help build your credit. To ensure the new line of credit positively impacts your score, use the cards responsibly by paying off balances on time and in full every month. 

Apply for a Secured Credit Card or a Credit Builder Loan
A secured card requires a refundable deposit that acts as your credit limit, making it a great option for your first credit card. Use it for small purchases and pay the balance on time and in full each month. Additionally, some financial institutions offer credit builder loans where the borrowed amount is held in a savings account until it is paid off. Making payments helps build your credit without taking on risky debt.

Become an Authorized User 
Ask a family member with established credit to add you to their account. Their positive credit history may help establish yours.

Remember to be responsible with credit and only spend what you can afford and avoid carrying a balance on your card. Any unpaid balance will continue to accrue interest. Building credit takes time, but these steps provide a reliable foundation.

 

How to Fix a Poor Credit Report

If your credit score isn’t where you’d like it to be, you can build it back up! Rebuilding credit is similar to establishing it. The best way to rebuild your credit is to start implementing the good credit habits mentioned above, namely paying your debts on time and in full, keeping balances low and avoiding new debt. 

Keep in mind that on-time payments are the biggest factor affecting your credit score. A payment that’s more than 30 days past due can lower your score by as many as 100 points.

If your debt has you feeling overwhelmed, check out our blog Three Straightforward Strategies for Repaying Debt. Here, you’ll learn about the avalanche and snowball repayment methods. Choose a strategy, cut your spending and stick to the game plan. You can do it! 

If you need additional support, consider these tools:  

Check Your Credit Report for Errors: 
Errors on your credit report can hurt your score. Remember to review your credit reports regularly and dispute any inaccuracies with the credit bureaus. For guidance on disputing credit report errors, check out this blog by Nerd Wallet.

Consider a Debt Management Plan: 
If you’re overwhelmed with high-interest debt, a debt management plan through a reputable credit counseling agency can help simplify payments. SDCCU is pleased to offer free financial counseling services to our members through our partners at BALANCE. For more information, visit sdccu.com/balance. 


Maintain Your Credit Score

Once you’ve built or improved your score, continue to practice the healthy credit habits you’ve established!

Managing and building your credit score is a clear, step-by-step process. Whether you’re building, repairing or maintaining your credit, consistency is the key. With good habits, your score will improve over time and you’ll be on your way to the leaderboard with a new high score!

Visit our Financial Knowledge Blog to learn more tips on setting up a solid financial future or join us for Financial Wellness Wednesdays.