6 Basic Facts About Credit Everyone Should Know

Wednesday, December 1st, 2021
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When it comes to credit and your score, it can be easy to become confused. There are so many rules and regulations that come with building credit, it can be difficult to understand. Knowing these basic facts can help make your financial journey less intimidating and more exciting!

1. Credit scores depend on five factors

All five of these will affect your FICO score and will have varying degrees of importance for your total score. They are also used with other credit bureaus like VantageScore. It is vital to be familiar with them all, but here is a brief breakdown of each factor and how they relate to your FICO score.

  • Payment history: For FICO, this is the most important factor to watch. This is because your ability to make payments every month will determine how reliable you are.
  • Utilization: This shows how much you have (your limits) compared to what you are actually using.
  • Credit history length: Although it does matter, your credit history is a less important factor compared to payment history and utilization. This provides a snapshot of your ability to pay and how you use your cards.
  • New credit/inquiries: You must get inquiries to get credit, of course, but having too many hard checks can negatively affect your score.
  • Diversification of credit: Having credit in different areas (and paying on it successfully) shows that you can manage your finances responsibly.

2. Scores vary greatly

Speaking of FICO scores (which almost all lenders check before giving you credit), yours will range between 300 and 850. The lower the number, the lower your score. It is good to know which scores fall at what level so you know where you stand. For example, 850 is the best score, 739 is fair, and 300 is the worst possible score.

3. You CAN check your own score

You may have heard that you can not check your score at all, but this is a myth! You are allowed to order your own report or check your score without it affecting your credit. These are called soft checks and as long as you don’t do them too often, you will be safe from lowering your score. Here are three main ways you can check your credit.

  • Ask your financial institution. You can ask about other information as well, like help with building credit and getting loans. They will not be able to grab your credit score in ANY situation, however. You must be applying for a loan, for example.
  • Look online for a free service. You can get a free credit score check from Experian, TransUnion, and Equifax once per year.
  • Ask your credit card company for your score. You can also ask about other things related to your card to make sure you are getting the best deal.

4. Having a low credit score can cost you

When you have a low score, it can be difficult to get new credit. Lenders see your score as a way to gauge your responsibility, so if it is low, they will charge you a higher interest rate. You could easily spend more money over time on things like home loans, getting an auto loan, renting an apartment, and even getting a new credit card. This is why people tend to focus on repairing their scores.

5. Paying less than the minimum may not count as a payment at all

Even if you pay something on your credit cards, if it isn’t at least the minimum, it could count as a missed payment. This means that you could see a drop in your score. It is best to pay at least the minimum every month, if not more, to make sure you are in good standing. Tip: Paying more will help you get out of debt faster and reduce the amount of interest you pay.

6. Cancelling old credit cards may not be a good idea

Because the length of your credit history is a factor in your score, it can actually hurt your score to cancel old cards. Keeping open higher limit cards is best, although any open cards will also contribute to your utilization score. You may have heard that keeping a card open but not using it will hurt your score too, but this isn’t true.

Want to learn more about your credit?

Speak with one of our staff today. By joining Borger Federal Credit Union, you will see many benefits including financial education, lower loan rates, and personalized service! You can reach us at (806) 273-9506 or Contact us by email. Becoming a Member is easy: if you live, work, attend school, or worship in Hutchinson, Carson, or Gray Counties, you are eligible to join!