Do You Have Bad Credit? How to Identify and Take Steps to Correct It

What Is a Bad Credit Score?

The first step to assessing your credit score is understanding the scale used and the ranges for poor to excellent credit. FICO® credit scores are most often used by lenders to determine your credit health. The scale ranges from 300 to 900 (or 850 depending on which kind of credit score model) and anything beneath 670 is considered “poor credit.” Ideally, you want to have a credit score that falls in the 670 to 900 range.

Why Do I Need Good Credit?

Having a good score can make your financial life easier and less expensive. Some of the benefits to a high FICO® credit score include, but are not limited to:

• Better rates on loans and insurance
• Lower credit card interest rates
• Qualifying for higher credit limits
• More housing options
• Access to utility services without a security deposit

What Impacts My Credit Score?

We’ve talked a little about what a good credit score looks like and how it can affect your day-to-day life, but what is a credit score based on? Your score is composed of five categories:

1. Payment history (35%): This is the largest part of your credit score calculation. It’s determined by your timeliness and consistency when paying bills.
    
2. Amounts owed (30%): Amounts owed, or credit utilization ratio, looks at how much of your available credit you’re using. Ideally, your ratio should be less than 30%.
    
3. Credit history length (15%): The rule of thumb is that the longer your credit history, the better.
    
4. New credit (10%): New credit considers how many new lines of credit you’ve opened. Each time a “hard inquiry” is run on your credit, the more potential there is to hurt your credit score.
    
5. Credit mix (10%): Your credit mix is how many credit products you have, such as auto loans and credit cards. People with high credit scores typically have a diverse credit portfolio.

Steps to a Better Credit Score

Now that you understand what a credit score is and its value to your financial health, let’s figure out how to improve a poor credit score.
 

Bad credit can happen to anyone, so you shouldn’t feel discouraged. It’s never too late to change your credit score, especially if you keep the following tips in mind:

• Check your free credit score and report: The best way to figure out your destination is to know your starting point. A credit report will show you how you’ve utilized your credit for the last decade. For FCU members who use online and mobile banking, you can access your report through our user-friendly platform. If you aren’t a member, there are three credit reporting bureaus that have your credit report: Experian, Equifax and TransUnion.
  
  While there are people who will warn you about checking your credit score in fear that it will lower your score, this action is known as a soft inquiry, and it won’t impact your score at all. Check your credit score once a month to stay on top of any changes and to see if any of your habits are hurting your credit health.
   
• Check report for errors: Believe it or not, more than one-third of credit reports have errors that make it harder for people to get approval for loans and credit cards. Check your report for errors such as incorrect personal information, incorrect accounts, missing accounts, incorrect public records and fraudulent activity. If you spot any of these mistakes, you can dispute them directly with the credit bureau that generated the report and they will attempt to resolve the issue.
   
• Pay down debts: We’ve already talked about how your credit utilization score should be lower than 30%. The best way to accomplish this is by paying off your credit card bills every month or attempting to pay down the debt as much as possible. 

• Pay off high interest, new credit accounts first: If you’re having difficulty paying your credit card bills in full, focus on paying off high-interest, new credit. Since new credit accounts for 10% of your credit score, it’s best to keep debt in this area low.
   
• Pay balances on time: Payment history makes up the largest portion of your credit score and lenders are looking to see that you consistently pay your bills on time. To make sure you’re a safe bet for lenders, you’ll want to make paying off your balances a priority when you create your budget.

How Long Will It Take?

Rome wasn’t built in a day, and, unfortunately, good credit doesn’t happen overnight. Rather, it’s a combination of actions over time that will help you achieve the credit score you want. However, if you continue to pay your bills on time, pay down your debt and take the steps we discussed, you can improve your credit score and open new doors for your future.

We’re Here to Help

For more helpful tips and tricks on how to manage your credit score and improve your finances, visit a branch, or call 1-800-284-1144 to speak to one of our member service representatives about your financial needs. Be sure to ask about a free credit report analysis!