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The Importance of Credit Scores and Reports

March is National Credit Education Month. It’s perfect time to educate yourself on the importance of understanding how your credit score affects your ability to reach your financial goals. Your credit rating is a barometer of your financial trustworthiness. A “good” credit rating means your history of payments, credit mix, length of time you have had credit, employment, and salary make you a suitable candidate for loans, and financial lenders will be more willing to work with you.

Why You Should Review Your Credit Report Annually

One in five Americans find errors on their credit reports, and more than 90% of home and auto insurers use credit ratings to decide who to cover and what premiums to charge. Because of these reasons, you should actively monitor your credit score as well as educate yourself on how to properly manage it. Contrary to popular belief, credit scores are not part of your credit reports, although credit scores are calculated from data on your credit reports and may be delivered along with it. You also may not know that you may have more than one credit score — each credit bureau or company that provides credit scores calculates them using different credit scoring models. Because of this, your credit scores may vary. Another reason your score may vary is that the underlying credit data may be different since not all lenders report to all three nationwide credit bureaus. Some report to only two, one, or none at all.

It’s a good idea to review your credit report and scores on an annual basis. You are entitled to a free copy of your credit reports every 12 months from each of the three nationwide credit bureaus. Request Your Free Credit Reports Here.

What is a FICO score?

FICO is an analytics software company best known for producing the most widely used consumer credit scores that financial institutions use in deciding whether to lend money or issue credit. A higher score means you are more likely to end up with attractive rates and terms on your loan. You may be approved with a low score, but with worse credit terms. FICO scores are used in more than 90% of the credit decisions made in the U.S. and can be a deal breaker with numerous lenders. Many maintain strict FICO minimums for loan approval, most notably in the mortgage industry. One point below their established threshold can result in a “no.”

If you know your scores, you can assess how likely it is that a loan application will be approved, and whether the creditor is likely to offer favorable terms. You can check the lender’s website to see if there is a threshold and which scoring model the company uses; however, some companies may not share this information.

What Your Score Means

<580: Poor

580 – 669: Fair

670-739: Good

740 – 799: Very Good

800+: Exceptional

Understand How Your Score is Calculated

In the U.S., there are three major credit reporting agencies – Experian, Equifax, and Transunion. These three agencies report, update, and store consumers’ credit histories. The three agencies do not calculate scores exactly the same, but there are five main factors they all use when calculating a credit score:

  1. Payment history – This is important because it only takes one missed payment to impact your score.
  2. Total amount owed – Using more than 30% of your available credit is a red flag to creditors.
  3. Length of credit history – A longer credit history improves your score.
  4. Types of credit – A mix of credit accounts (car loan, mortgage, credit cards, finance companies, etc.) make a positive impact on your score.
  5. New credit – Too many recent credit account additions signal risk and will negatively affect your score.

Here is a breakdown of how your score is calculated:

  • Payment history: 35%
  • Total amount owed: 30%
  • Length of credit history: 15%
  • Type of credit used: 10%
  • New credit: 10%

Improve Your Credit Score

Your credit score changes every time information is updated and can rise or fall based on the new information. Here are some ways you can improve your credit score:

  • Pay your bills on time. Six months of on-time payments is required to see a noticeable difference in your score.
  • Up your credit line. If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. It is important not to spend this amount so that you maintain a lower credit utilization rate.
  • Minimize your debt. Familiarize yourself with your credit utilization ratio. This is the total amount of debt you carry as compared to your combined credit limits. Your goal should be to keep the ratio at less than 30%.
  • Open new accounts only when necessary. When you apply for new credit, it adds a “hard inquiry” on your credit report which has a negative effect on your credit rating that can last for up to two years.
  • Don’t close a credit card account. Even if you do not plan to continue using a credit card, don’t close the account. This could hurt your credit score. For instance, if you have $1,000 in debt and a $5,000 credit limit split evenly between two cards, your credit utilization rate is 20%. Closing one of the accounts puts your credit utilization rate at 40%. Lenders want to see a rate below 30%.
  • Engage a reputable credit repair company. If you don’t have the time to improve your credit score, credit repair companies will negotiate with your creditors and the three credit agencies on your behalf, in exchange for a monthly fee.

Educate Yourself at the Allegiance Financial Education Center

To educate our community and customers on how credit scores and reports work, Allegiance Bank has partnered with EVERFI to create our Allegiance Financial Education Center. With these tips, we can help you develop healthier credit habits. Our financial center provides access to modules that you can complete in less than 10 minutes. Explore a variety of topics that include information about:

  • The types of financial institutions and other companies that may use your credit score
  • The importance of credit, how to monitor credit, and how to improve and maintain credit

To discuss your borrowing needs and to learn more about Allegiance Bank Loan Products, contact an experienced Allegiance Banker today. We look forward to talking with you about your plans and can provide sound recommendations about the type of loans that are right for you and your family.

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