Moore for Your Money Blog

Today’s economy runs on credit. Want a mortgage loan, a car loan or credit card? You will need good credit. And good credit helps with more than borrowing; it can factor into everything from renting an apartment to getting insurance or a cell phone. Lenders, landlords, and utility companies may all review your credit report when making decisions. I cannot stress enough the importance of establishing good credit habits to help you build and improve your credit history and credit score. However, many people do not know about the credit scoring system—much less their credit score—until they need it. Here is some information to help you understand the credit score process and its implications.

What is a credit score?

A credit score is a three-digit number ranging from 300 to 850 that lenders use to help them decide whether you can get a mortgage, a credit card or some other loan, and the interest rate you will be charged for this credit. The score is a picture of you as a credit risk to the lender at the time of your application. Each person has their own credit score. If you are married, both you and your spouse will have an individual score, and if you are co-signers on a loan, both scores will be used in making decisions. The riskier you appear to the lender, the less likely you will be to get credit or, if you are approved, the more that credit will cost you. In other words, you will pay more to borrow money.

What are the components of a credit score?

• Payment History (35%)
• Ratio of Debt to Available Credit (30%)
• Length of Credit History (15%)
• Types of Credit Used (10%)
• Recent Searches for Credit (10%)

What is a good credit score?

• Poor Credit: 300-579
• Fair Credit: 580-669
• Very Good Credit: 740-799
• Excellent Credit: 800-850

How do I keep a good credit score?

• Pay your bills on time, every time. Set up automatic payments to help you stay on track.
• Stay below your credit limit. I would advise you to keep your use of credit at no more than 30 percent of your total credit limit. 
• A long credit history will help your score. The more experience your credit report shows with paying your loans on time, the better.
• Only apply for credit that you need. Credit scoring formulas look at your recent credit activity as a signal of your need for credit. If you apply for a lot of credit over a short period of time, it may appear that your financial circumstances have changed negatively. 
• Check your credit reports. If you suspect errors, dispute them. If you have old credit card accounts you are not using, keep an eye on them to make sure that an identity thief is not using them. You can get a free annual report at www.annualcreditreport.com.
• Follow the 20/10 rule of credit. The 20/10 rule means that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to make debt repayments.

A good credit score is something anyone can be proud of. If you continue to practice responsible credit habits, you will have a smoother financial future. Use your good credit score to save on interest, improve your spending habits, earn rewards, and build an even stronger credit score over time. Let us know if we can answer any questions you may have about your credit. All of us here at the Anahuac National Bank family of banks are here to help. We thank you for banking with us.