Why Your Credit Score Matters and What to Do About It

Do you want to improve your credit score? Start building your credit? Maintain, protect, or strengthen your already solid score? We’ve got you covered for all of the above.

What is a credit score?

Your credit score is a number that indicates to lenders how strong of a borrower you are. The most commonly used credit scoring system is the FICO Score (here’s what it is and how it works).

The five categories that make up your FICO Score are:

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• Types of credit used (credit mix): 10%
• New credit: 10%

We cover some actions you can take to boost your credit score in our blog, “Score! How to Earn a Winning Credit Score.”

Why your credit score matters

Your credit score is often a determining factor in the auto loan, mortgage, or credit card rates you are eligible for. The higher your credit score, the more competitive rates and terms you are typically able to qualify for. Insurance companies and landlords also may check credit scores before taking on new customers or tenants. They want to make sure they can count on their customers to pay on time.

Experian puts it this way: “Having good credit is important because it determines whether you’ll qualify for a loan. And, depending on the interest rate of the loan you qualify for, it could mean the difference between hundreds and even thousands of dollars in savings. A good credit score could also mean that you are able to rent the apartment you want, or even get cell phone service that you need.”

The difference between credit and debt

Credit is the amount of money accessible to be borrowed. For example, if you have a credit card with a $10,000 credit limit, that means you can borrow up to $10,000 on that card.

Debt is the amount of money already borrowed and now owed back to the lender. For example, if you borrowed the entire $10,000 of available funds on your credit card in the example above, you would owe $10,000 back to the lender. You could also say you have $10,000 in debt.

Side note: This would be an example of “maxing out your credit card”—spending the entire credit limit so there is no more to spend. That’s a situation you want to avoid, and this Experian article shares tips on what to do if you max out your credit card.

Credit utilization matters

Credit utilization is the amount of credit you’ve used compared to the amount you have available from your lender. For example, let’s use the same credit card with a $10,000 limit from above. If you spent $2,000, your credit utilization would be 20%. You used 20% of your available $10,000 credit and have 80% ($8,000) left to use. If you spent $8,000, your credit utilization would be 80%. A commonly accepted guideline is to keep your total credit utilization—across all loans, credit cards, and other debt—under 30% for the best credit score. And if you’re able to keep it under 10%, experts say that’s even better.

Tips if you’re just starting to build credit

The first thing to remember is that it takes time to build credit. So be patient with yourself and stick to your plan!

Credit inquiries

It’s important to also keep in mind that every time you apply for a credit card, the lender will likely review your credit report, which will typically decrease your score. It’s called a “credit inquiry.” This TransUnion article explains the difference between hard and soft credit inquiries, what to pay attention to, and why credit inquiries matter.

Do not carry a balance

The third thing to remember is that you do not want to carry a balance. A popular way many people start building their credit is to use their new credit card on all or most of their daily purchases. Then they make sure to pay those purchases off completely each month. Over time, this shows that they always pay back the money they borrow, which increases their credit score.

If you use this approach, it’s important to keep in mind that you should only spend with your credit card what you actually have available in your checking account. A credit card can easily become a crutch to buy more than you actually can afford. That’s where many consumers go wrong and get into excessive debt. Don’t fall victim to the mindset that a credit card gives you more purchasing power than you would otherwise have. Be sure to stay within your means.

Enjoy the benefits of rewards cards, but keep your spending in check

Many credit cards offer rewards and/or cash back. Using these kinds of cards can give you back some of the money you spent on your card, or rewards you can redeem in the form of airline miles, gift cards, or merchandise. The Vantage West Connect Rewards Visa Signature offers 5% cash back in a category of your choice, including travel, utility bills, Amazon, and more, with no annual fee.

It’s important to be aware of your spending and be vigilant with your spending, regardless of how many rewards points or cash back you’re getting. The Balance puts it this way:

“Choosing the right rewards credit card can allow you to earn major perks on your credit card spending. But keep an eye on your purchases. If you’re always chasing rewards and bonuses, you could rack up a credit card balance that you can’t afford to repay.”

Be wary of co-signing

If a friend or relative asks you to co-sign a loan or credit card for them, seriously consider the repercussions if you say yes. A co-signer is someone who adds their name to someone else’s loan application, legally binding them to pay back the loan if the primary borrower cannot. Here’s what NerdWallet says about it:

“Most people want or need a co-signer because they can’t qualify for the loan by themselves. If you have a strong financial profile, co-signing for someone with a lower credit score or thin credit profile can improve their odds of qualifying or snagging a lower interest rate. Unlike a joint loan in which two borrowers have equal access to the loan, in a co-signed loan, the co-signer has no right to the money even though they could be on the hook for repayment.”

Tips for repairing credit

There are many reasons a person’s credit score may need repairing. If you’re in this place, the first thing to remember is to be kind to yourself. You are not a failure because your credit score could use improvement. Many people need to rebuild their score at some point in their lives.

Start here

If you haven’t read our blog mentioned above, “Score! How to Earn a Winning Credit Score,” we recommend doing so. It’ll give you some guidelines to make sure you’re following so you can get the best possible score for your situation. Some of the tips in the section above about starting out to build your score may be helpful for you, too. Then, check out “3 Reasons to Monitor Your Credit Report and How Vantage West Can Help” if you are new to credit monitoring. After that, we have a few more tips below to get you going in the right direction.

“It’s complicated”

We know that there are sometimes reasons outside of a person’s direct control that decreases their credit score. Examples include going through a divorce, or a friend or family member failing to pay a loan you co-signed on. For situations like this, it is sometimes necessary to get a lawyer or credit counselor to help analyze your options and create a customized plan.

Figure out where you’re at

If you’re not sure what your financial situation is, a good place to begin is by asking yourself three questions:

1. What is my monthly income?
   Include all sources of income—primary job, second job or side hustle, gifts, child support, stipends, or any other money you receive each month.
   
   
2. What are my monthly living expenses?
   Include rent/mortgage, groceries, insurance, credit card bills, hospital/dental/medical bills, pet food, car insurance, car loan, gasoline, other.
   
   
3. What’s the difference?
   Subtract your monthly expenses from monthly income. For example, if you made $2,000 each month and had $1,500 of living expenses each month, you would do $2,000 minus $1,500, which equals $500. You now know you have $500 left each month for saving, paying down debt, or other needs that may arise.
   
   You may find a negative number after doing this equation. For example, if a person made $2,000 each month and their expenses add up to $3,000, when they do $2,000 minus $3,000, they’ll see negative $1,000. In this example, they might be using a credit card for that remaining $1,000 each month, or may just not be paying their bills. Both actions would decrease their credit score.

Financial Review

Sometimes it takes someone who’s outside of your situation to offer feedback and options. That’s why we offer a free Financial Review to our Members. Just like a routine physical examination or dental check-up, Financial Reviews can help Members check in on their financial health. Our Financial Representatives help Members at all levels of their financial journeys to make sure they’re on target to achieve their goals.

You can take the answers to your three questions above into the appointment and ask the Financial Representative’s input on your next steps to getting your credit where you want it to be. Visit VantageWest.org/Financial-Review to schedule your complimentary appointment.

Consider consolidating

There are times when consolidating credit cards and loans into one loan can be helpful. The idea behind the debt consolidation approach is to give you only one monthly payment to track. Sometimes debt consolidation loans, often called personal loans, can reduce your monthly interest rate, as well.

It’s important to remember that you’re not guaranteed a lower interest rate by consolidating your debt. You’ll want to compare your current interest rate(s) with the consolidated loan rate and see if—and how much—you’d truly save by consolidating. Remember that if the debt consolidation means less money going to monthly payments, that also means it’ll take longer to get out of debt. As with anything, there are pros and cons to debt consolidation and this is another good discussion topic for your Financial Review.

If you decide the debt consolidation route is best for you, you may be interested in the Vantage West Personal (Signature) Loans.

Talk to debt collectors and see what arrangements you can make

If you haven’t made payments on credit cards or loans and the payments are severely past due, those companies’ debt collectors will contact you. It can be very helpful to discuss your payment options with the collectors. Sometimes they can modify or negotiate a payment plan that works for both of you.

Log into Credit Central

If you’re a Vantage West Primary Member, you have access to a free tool inside online and mobile banking. It’s called Credit Central¹ and it provides a way for you to check your credit score, credit report, and credit inquiries. You can also see all open and closed credit card and loan accounts—regardless of which institution they’re with—and sign up for credit monitoring alerts.

One thing that makes Credit Central different than a lot of tools, is that you can check your credit anytime, even as many times per day as you’d like, without impacting your score.

Head to this blog and look for the “Enjoy these features inside Credit Central” section for more details. Or, log into online or mobile banking, click “More,” and then click “Credit Central” to get started.

Never be surprised by your credit again, and make your score something you’re proud of!