Everything You Need to Know About Credit Scores

Credit and credit scores can be highly confusing, but understanding how they work is vital for surviving and thriving in the modern world. Here are the things you need to know to understand how credit works, how to build credit, and how to check your credit score.

Understanding Credit Scores

Your credit score is a numeric indicator of how risky you are to lend money to. It’s a three-digit number that will follow you through your life. For young people with no credit history, the base number is 300.

Credit scores range from poor to excellent. According to Equifax, the ranges are as follows:

  • Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very Good: 740-799
  • Excellent: 800-850

Other scoring models may use different numbers in their ranges. Just know that the three-digit number scoring model listed above is the most common.

Your credit score is calculated using factors on your credit report. This calculation includes how much debt you have, the length of your credit history, your payment history, etc. Not paying your debt on time can tank your score pretty rapidly. Using all of your credit limit also impacts your score; try to keep it below 30% for all accounts.

Why is Building a Line of Credit Important?

Your credit score heavily depends on borrowing and loaning money and paying it back on time. Over time, you have the opportunity to improve this score by borrowing money, making payments, and demonstrating financial responsibility.

You must have a line of credit to get a loan because it shows the lender that you will be able to pay back what you borrow. If you don’t have a line of credit, you may not be able to get a loan. If you can get one, you will typically pay higher interest rates and have a lower limit. Your credit cards will start with a low limit, although you can build this over time (most credit companies will slowly increase your limit as you demonstrate that you can be trusted).

A low credit score can result in you not being approved for a loan. Many financial institutions have hard limits on the lowest score they will take for mortgages and personal loans. It can also result in paying more interest. It doesn’t just affect loans; many employers will do a credit check, and while they don’t get the score per se, they get the credit report used to generate it. They use them as an indicator of responsibility. You will also likely need a good credit score to rent an apartment, so a low credit score can make the basics of living hard. In general, people with low scores will need a cosigner on loans and rentals.

5 Ways to Build Credit

You need to borrow money to build credit, and you need a good credit score to borrow money. This Catch-22 makes building credit hard sometimes, but some tried and true ways to build credit are outlined below.

  1. Get a credit card. If you aren't able to get a regular credit card, you can sometimes get a secured credit card, which means that you put down an amount of cash, and that is your credit limit. This gives you the convenience of a credit card without needing a high score. Then use it sparingly. You should keep your credit utilization ratio below 30%. So, if you have $500 on your secured credit card, you should never exceed $150 in spending.
  2. Get a credit-builder loan. These are designed purely to help you build credit. You borrow a small amount, which the lender doesn’t release to you until the loan is paid in full. Consider it a forced savings program. Credit unions most often offer these.
  3. Become an authorized user on somebody else’s card. This is how young people can sometimes get a higher credit score. Ask an older relative to add you to their card. Make sure to choose somebody with a good history of paying on time. You don’t even have to have the card; just have access to it, although it can be a good alternative to a secured credit card if you come to the right arrangement.
  4. Pay your bills on time. Pay rent, utility bills, etc., on time. Then arrange to have those payments added to your credit report. This is pretty much the only way to build credit without borrowing money, but it can make a huge difference. Experian Boost adds your bills, while UltraFICO can also add in your bank account balance and cash flow.
  5. Practice good credit habits. Make sure that you have good “financial hygiene” from the start. Keep your utilization as low as possible, make all your payments on time, keep old accounts open, and don’t apply for multiple credit cards, especially close together—the latter results in “hard” inquiries, which affect your score.

If you do all of these things, you can start to build your credit score!

How Long Does It Take to Build Credit?

Unfortunately, building credit is not an overnight thing. Credit is based on your history. Thus, it takes several months to increase your credit score into a reasonable range.

You need to be patient (and if you absolutely have to borrow money in the interim, you may need a co-signer willing to take on the risk for you).

How To Improve Credit

Since a low credit score can affect your ability to get housing and loan approvals, improving your credit is vital. Here are a few things you can do to improve your credit score:

  1. Check your credit score regularly and dispute any errors. One in five people finds at least one mistake on their credit report. First, ensure it is an error; once the error is confirmed, you can usually get it removed.
  2. Pay all of your bills on time. It’s a good idea to automate payments. Yes, this means everything.
  3. Keep your credit utilization low. As mentioned, keep it below 30% or as low as possible. Watch for this if you use credit as a way not to carry cash. You can also lower your utilization by requesting higher limits.
  4. Limit your credit applications. Checking your score does not affect it, but any “hard” request for your score can lower it. So, don’t apply for three or four credit cards at once. (Note that for loan applications, you can typically get all inquiries counted as one).


How To Check Your Credit with ProFed’s Free Credit Score Tool

Regularly checking your credit is vital and easy to do with our new credit score tool located within digital banking - access it on the go and conveniently check your credit score up to once daily. All you have to do is log in to ProFed Digital Banking and sign up for the free tool. 

We also have many other digital tools on our website, including calculators for your home and personal financing needs to help you identify if renting or buying is the best option for you, how much car you can calculators for your home and personal financing needs to help you determine if renting or buying is the best option for you, how much car you can actually afford, and more. You can also check out Money Sense, our free educational tool offering online financial literacy courses for the whole family! Contact us if you need help navigating any of the digital tools available.