Cents of Community: Building Your Credit Score

This monthly column comes from the Arlington Community Federal Credit Union as part of their mission to financially empower the community. Credit unions are not-for-profit member-owned cooperatives and anyone who lives, works, worships, volunteers, goes to school, or does business in Arlington, Falls Church, Alexandria, or Fairfax County is eligible to join ACFCU.*

Credit scores are a three-digit scoring system that financial institutions and other lenders use to determine whether you qualify for loans and what your interest rate will be.

Building up your credit score is critical for saving money long term with lower interest rates and insurance premiums. It also helps to ensure that you will be able to access credit when you need it. Most lenders use a FICO score, which ranges from 300-850, and is based on your reported payment history from all your creditors.

Here are some of the key components that make up your credit score and things you can do to bring your score up:

• Payment history: A history of paying bills on time is the biggest component and accounts for 35% of your score. Set up autopay to ensure your bills are always paid on time.
• Utilization: 30% of your credit score is determined by how much of your available credit you are using. Pay down credit card and line of credit balances until you are using 30% or less of your available credit (for example 30% of your total credit card balance) to help build a healthy score.
• Length of credit history: Starting a credit history early is a great way to get a head start on building your credit score for the future. Your total length of history counts for 15% of your score. One way to start building credit is with a secured credit card. Secured credit cards require a deposit and your credit limit is based on the amount that you are willing to deposit. Make sure to use your credit card responsibly!
• Credit Mix: Credit scores consider the mix of types of credit on your credit report (e.g. mortgage, car loan, credit card). This makes up 10% of your score. Having a few different types diversifies your credit, but secured credit is generally a stronger indicator for your score. Secured credit means that there is collateral associated with your loan. Secured loans include mortgages and auto loans.
• New Credit: Opening several accounts in a short period of time (e.g. multiple credit card applications within six months) may reduce your credit score, especially if you have a short credit history. New credit accounts for 10% of your score. However, the score will recognize if you are shopping for rates (e.g. applying for a car loan with multiple lenders) within a limited period of time. Applying for credit or opening a new account can have a negative impact on your credit score but this drop is typically small and doesn’t last very long.

If you’re applying for a loan or credit card, consider having a conversation with your lender about your credit history and score. If your score isn’t where you want it to be, they may be able to offer suggestions to help you raise your score.

* Membership eligibility requirements apply. Federally insured by NCUA.