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Westerra Credit Union

How to Manage Your Credit Score - and Save Money

What is a Credit Score?
What Determines Your Credit Score?
How Can You Improve Your Credit Score?
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Whether you are buying a home, a car or applying for a credit card, financial institutions rely on your credit score to determine what level of risk they assume by approving your loan. Your credit score affects how much you can borrow and what loan terms (interest rate, etc.) you will receive. Taking steps to improve your credit score can qualify you for better interest rates and save you money.

To help Westerra members better understand their credit score, we looked to the Fair Isaac Corporation (FICO) scoring model. The FICO® score is the most widely used in the financial services industry to help make credit decisions. The information presented here is largely provided by FICO at www.myfico.com.

What Is A Credit Score?

FICO scores are provided to lenders by the major credit reporting agencies. The three primary credit reporting agencies – Experian, TransUnion, and Equifax—use software developed by FICO to produce a credit score based on information they keep on file about you. As this information changes, your credit score tends to change as well.

In order for your credit score to be calculated, credit bureau reports must contain at least one account that has been open for at least six months, and each report must contain at least one account that has been updated in the past six months, according to FICO. This ensures that there is enough information – and enough recent information – in each report on which to calculate a FICO score.

FICO scores provide the best guide to future risk based solely on credit report data. The higher the credit score, the lower the risk. But no score says whether a specific individual will be a “good” or “bad” customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

What Determines Your Credit Score?

FICO scores are calculated from a lot of different credit data in your credit report. This data is grouped into five categories as outlined below.

Payment History

  • Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
  • Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
  • Severity of delinquency (how long past due)
  • Amount past due on delinquent accounts or collection items
  • Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
  • Number of past due items on file
  • Number of accounts paid as agreed

Amounts Owed

  • Amount owing on accounts
  • Amount owing on specific types of accounts
  • Lack of a specific type of balance, in some cases
  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
  • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History

  • Time since accounts opened
  • Time since accounts opened, by specific type of account
  • Time since account activity

New Credit

  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems

Types of Credit Used

  • Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
  • A FICO score takes into consideration all these categories of information, not just one or two. The importance of any factor depends on the overall information in your credit report. While the levels of importance shown here are for the general population, they will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time. Remember, your FICO score only looks at information in your credit report and considers both positive and negative information in your credit report.

How Can You Improve Your Credit Score?

There is no quick fix to improving your credit score – in fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.

Payment History Tips

  • Pay your bills on time. Delinquent payments and collections can have a major negative impact on your FICO score.
  • If you have missed payments, get current and stay current.  The longer you pay your bills on time, the better your credit score.
  • Be aware that paying off a collection account will not remove it from your credit report.  It will stay on your report for seven years.
  • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.  This won't improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

Amounts Owed Tips

  • Keep balances low on credit cards and other “revolving credit.”  High outstanding debt can affect a credit score.
  • Pay off debt rather than moving it around.  The most effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
  • Don't close unused credit cards as a short-term strategy to raise your score.
  • Don't open a number of new credit cards that you don't need, just to increase your available credit.  This approach could backfire and actually lower your credit score.

Length of Credit History Tips

  • If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.  New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

  • Do your rate shopping for a given loan within a focused period of time.  FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
  • Re-establish your credit history if you have had problems.  Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
  • Note that it's OK to request and check your own credit report.  This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

  • Apply for and open new credit accounts only as needed.  Don't open accounts just to have a better credit mix - it probably won't raise your credit score.
  • Have credit cards - but manage them responsibly.  In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
  • Note that closing an account doesn't make it go away.  A closed account will still show up on your credit report, and may be considered by the score.

As champions of financial stewardship, we are working to help Westerra members manage their credit, and their credit score—and save money. If you have additional questions about your financial circumstances, our financial service representatives stand ready to help. Simply call 303-321-4209.