As kids, we’re told to be careful or a bad grade will go on our permanent record. As adults, that ghostly boogeyman becomes our credit score—the mysterious, ever-changing number that impacts so many things in our daily lives. But what is it? And why does it sometimes fluctuate like a roller coaster? Heritage Bank branch services officer Jenny VanLaanen helps explain.
“Credit scores are based on how you have managed debt in the past,” says VanLaanen. “Lenders use this score to determine the level of risk you pose as a potential borrower. If you have a history of on-time payments and managing debt responsibly, you’re likely to have a better credit score.”
One example can be seen in homebuying. “The higher your credit score the better your chance of qualifying for the best terms on a loan,” says VanLaanen. “Even a small difference on your credit score can add up to hundreds in monthly savings or even thousands over the life of the loan.” If you purchased a $250,000 home with a FICO credit score of 720 instead of 670, you’d save more than $26,000 over the life of the loan, according to Experian. Your credit score also impacts home and auto insurance premiums and occasionally whether a landlord will even rent to your or a cash deposit is required for services like cable or phone.
VanLaanen recommends checking your scores “annually, if not every six months.” And don’t worry, “checking your own credit doesn’t affect your score.” But what does impact the overall number? It’s a variety of things. “Payment history accounts for up to 40% of your credit score, so strive to never miss a payment. Keep credit cards open because the length of credit history accounts for 15% of credit score. Also mixing up the types of credit: credit cards, student loans and auto loans. This helps score well in the credit mix.”
And be careful, there are some subtle ways you might be lowering your score without knowing it. VanLaanen says there are three common factors that influence the final score. “One of the biggest factors that affects your credit is the amount owed. You want to keep this under 30% of your available credit to prevent your credit score from dropping.”
The other two may seem like good ideas at the time but have unexpected consequences. Think twice about closing a credit card for good. “Finally paying off a card may be exciting, and you may think it’s best to close it; however, you will want to make sure you don’t have outstanding balances on other cards too,” says VanLaanen. “The reason closing a credit card account affects scores is because you lose the available credit on that account however your outstanding debt remains the same.”
Also beware of “applying for store cards for discounts,” advises VanLaanen. “This may sound simple: sign up, get the discount, pay it off, close it; no harm! However, this can be harmful. New credit accounts for 15% of your score so opening too many new accounts within a short timeframe can be a red flag that drags down your score.”
Some people have difficulty getting a credit card due to issues with their income, financial or payment history, or a recent bankruptcy. For those customers, VanLaanen suggests applying for “a secured credit card. This will help them build up their credit over time allowing them to qualify down the road for an unsecured credit card.”
A secured card is a little like renting an apartment. The issuer holds a cash security deposit to cover any little “oops” moments which may arise. If the card is properly maintained, the borrowers deposit remains intact; if problems occur, the lender can cover it from that money.
Parents, consider talking with your kids about their future credit too. “Just teaching them the basics and importance of earning, saving and spending before they become teenagers will help a lot,” admits VanLaanen. “Instill the importance of making payments on time and explain how a negative credit score could impact future large purchases for them like cars, apartments and homes will help them.”
Credit can feel both scary and confusing. But it’s also a valuable, lifelong tool. If you’re unsure what may be the best option for you, consider making an appointment at your nearby Heritage Bank to learn more about their credit card choices or credit score insight. With nearly 100 years of history and industry experience, they’re sure to maximize your credit journey whatever the starting point. Elementary school permanent record not required.