How is your credit score calculated?

If you’re like most of us, you may temporarily blackout anytime someone mentions the words “credit score”. It’s a number that means so much, yet many of us barely pay it any attention. In fact, according to TransUnion, a popular credit reporting agency, nearly 70% of Americans say they have little to no understanding of credit scoring.

Unfortunately, you can’t ignore your credit score for long. If you’re carrying a low score, for example, you’ll likely pay more interest on loans, could see your insurance premiums increase and be unable to buy a home or car, land a job or rent an apartment.

Here’s a simple breakdown to help you see exactly what affects your score and where to focus your efforts to keep your score nice and high.

Credit Report Breakdown

35% Payment History

This is the FIRST thing that any lender wants to know; if you have had payments in the past and how you handled paying them. Missing a payment or making only minimum payments will have an effect on how this score is created.

30% Amounts Owed

This is calculated by all the amounts owed such as credit cards and other installment loans, i.e. car loan. Having a very small balance without missing a payment shows that you have good credit responsibility that can create a better score than having no balance at all.  Closing unused credit cards without a balance and or with good credit standing will not raise your credit score. However someone who is “maxing out” cards and using a lot of credit shows that they may have trouble making payments in the future and it will be reflected in this part of the credit score.

15% Length of Credit History

This area is taking a look into how long your credit accounts have been established (the age of your oldest account) and how long it has been since you used the credit accounts. Generally, a longer use of credit or someone who is new to credit will have a higher credit score, depending on how the rest of the report looks.

10% Types of Credit Used

This will take a look at the variety of credit (retail and credit cards, installment loans, finance accounts and mortgage loans). It will review what experience you have with these various types of loans and the total number of accounts that you have. This is checking to see your overall use with credit and looking to see if you have too many accounts for your specific “credit picture.”

10% New Credit

Someone who may open several accounts in a short period of time may show to be a higher risk individual especially if that person is new to using credit. It is recommended that you should wait at least 6 months in between opening a new credit account.

Now that you understand how credit is calculated, whenever you review your credit score you will have a better idea why a certain number is reflected or what steps you can take to raise the number. Setting up a long and healthy credit history is a great way to pave a positive future with lenders.

Source:
“What’s in My FICO Score.” FICO Credit Score Chart: How Credit Scores Are Calculated. MyFICO, n.d. Web. 26 Mar. 2014.

Your First Credit Card: A Q&A for the Real World

This is a guest post from Laura Edgar, a senior writer for NerdWallet, an unbiased personal finance website committed to improving your financial literacy.

 

It’s exciting to be a young adult! Chances are, your life is filled with many firsts, like living on your own, taking advanced biology classes, and managing your own finances. This is a great time to explore your world and try new things. It’s also the perfect time to get your first credit card. When used wisely, a credit card will help you build your credit history and credit score. At NerdWallet, we spend our days digging through credit card disclosures and answering the tough questions. Trust us: you’re not alone if you’re confused. You’ve already taken a great first step by coming to a not-for-profit credit union for your information. Here are some answers to the most commonly asked questions about credit cards.

 Why get a credit card?

A credit card offers you a secure and convenient way to make purchases. It will also help you build a credit history, which you’ll need when it comes time to buy your first car or apply for your first loan. You may even need a good credit score to rent a room or land a job. An increasing number of employers and landlords are requiring credit checks. Your credit score is literally your permanent record, so take it seriously. Use your credit card to make small, affordable purchases, not to buy things you can’t afford. You can certainly use your credit card to pay bills in an emergency, but always use this as a last resort.

What kind of credit card should I get?

For your first card, you’ll probably want a “starter card” or, if you’re a college student (part time totally counts), a college student credit card. Apple Federal Credit Union offers both. Their Credit Builder card offers a higher credit limit, but also requires you to put down money to secure it. You’ll get this money back when you close the account and graduate to a regular credit card. Apple FCUs Student credit card has a lower credit limit, but doesn’t require any money up front. Both cards have a very low APR, which is typical of credit union credit cards. You can read about each card in more detail here.

Should I pay attention to the APR or annual fee?

The APR is a percentage of your total balance, which you’ll have to pay in addition to your total balance if you rack up debt. You’ll never have to worry about the APR if you don’t carry a balance. That said, the higher the APR, the more debt you’ll have if you can’t make your payments. An annual fee is exactly what it sounds like: a yearly fee for the privilege of using a card. Apple Federal’s credit cards don’t have an annual fee, however.

Should I get a rewards credit card?

Rewards credit cards give you 1-5% back on your purchases. These cards also tend to have the highest interest rates. Rewards aren’t worth anything if you rack up debt. However, once you’ve spent a few years building your credit history and making regular payments, a rewards credit card is a great way to earn points or cash back for the purchases you make every day.

I’ve been told I need a cosigner. What does that mean?

If you’re at least 18 years old and have a full-time job, you can apply for a credit card on your own. If you’re under 21 and don’t have your own steady source of income, you’ll need to have your parent or guardian co-sign your application to get a card. This might sound annoying, but it usually gives you an edge. You’ll get to piggyback on your cosigner’s credit score, which may give you better options for credit cards.

What’s wrong with making minimum payments?

Your credit card statement will include a minimum payment option. If you like, you can pay this smaller amount and still be “in the clear” with your credit card issuer. However, this is exactly how people get into trouble and rack up debt. Don’t fall into the “spend now, pay later” mindset. When you incur debt, you are paying for the privilege of spending money you don’t have. Debt damages your credit score, which makes people less likely to lend to you in the future, and gets very, very expensive.

What if I have more questions?

That’s great! We’re serious; you should know exactly what you’re getting into before you sign up for a credit card. Make sure you read all the disclosures before you apply for anything. You can also stop by your local Apple FCU branch and ask a representative to help you. They can help you pick the right card for your needs and increase your chances of being accepted.