5 Things That Impact Your Credit Score

My First Credit Card Story

I was 19-years-old when my parents drove me to the BECU location in Tukwila to sign up for my first credit card. I was just about to start my sophomore year of college and I couldn't believe my parents wanted me to have a credit card. I still remember sitting down with one of BECU's Member Consultants who told me that I was approved for a $500 credit limit. As a 19-year-old, I was shocked that the credit union and my parents would trust me with that amount of money.

Before we left BECU, my parents told me that there was just one rule about having a credit card: don't spend more than you have in your checking account – even if my credit limit exceeded the amount in my checking and savings accounts. My parents had warned me that people get into trouble when they over spend and don't actually have the money to pay off their credit cards.

Fast forward to 2019 and I have two credit cards, one from BECU, and I'm still following the guidelines my parents shared with me years ago. As an adult, I've realized that a huge part of your financial well-being is having a healthy credit score. So today I'm breaking down what a credit score is, why you should care about it, and a few important things that factor into your credit score.

What is Credit? What is a Credit Score?

According to BECU Financial Educator Stacey Black, credit is the ability to buy now with the agreement to pay later, while a credit score is the number that tells lenders how likely someone is able to repay them. A score can range from 300 - 850, with the higher the number being better.

• Excellent: 750 and above

• Good: 700 to 749

• Fair: 650 to 699

• Poor: 550 to 649

• Bad: 550 and below

Banks, credit unions and lenders use your credit score to determine how likely you are to pay your debts back.

What Are the Two Types of Credit Should You Be Aware Of?

Revolving Credit:

If you have a credit card, you have revolving credit. You can purchase items on your credit card and pay back the amount spent on a monthly basis. With revolving credit, interest is added to your unpaid balance and must also be paid off.

Installment Credit:

If you have a car loan, you have installment credit. Typically, car loans and mortgages have a set monthly payment amount for a set period of time. Each payment amount depends on the loan terms, interest rates, if there was a down payment, and the cost of the item.

Why Should You Care About Your Credit Score?

If you have plans to purchase a car or a home one day, you should care about your credit score. I didn't realize how important my credit score was until I decided to purchase a new-used vehicle two years ago.

I was just two years out of college when the gold Honda Accord I inherited from my mom at 16-years-old was on its last leg. At almost 200,000 miles, my gold Honda barely passed its emissions test and my parents advised that I should probably buy a newer car. I called BECU to apply for a car loan and was surprised how quickly I was approved and how manageable the interest rate was. I quickly found my current car, a 2012 Honda Accord (I like my Hondas), and was able to purchase it with a BECU auto loan.

I had no idea that having a healthy credit score could help you get a great interest rate on your auto loan. A healthy credit score also helps you get approved for rental properties as well as lower insurance premiums. I was shocked when I learned that people without credit history could pay up to 65% more on auto insurance.

#2: Your Length of Credit History

Did you know that having older accounts indicate that you have good experience with credit?

Your credit score takes into consideration the average age of your accounts and your oldest account. Finance experts at BECU advise to always leave your credit cards open, even if they are seldom used. The age of your oldest credit card will help your score and closing it may actually take a hit on your credit score.

Stacey from BECU also shares: "When I'm at local high schools leading workshops on credit, I often advise to always leave your credit cards open, even if they aren't used often." She continues, "However, I would also add that if someone has too many credit cards and it's becoming difficult to manage, consider closing the newer ones or the ones that charge the highest annual fees."

Looking back I'm incredibly thankful that my parents took me to sign up for my first credit card at 19-years-old. I still remember some of my friends being shocked that I had signed up for credit card that year. But I learned that I could make big purchases like textbooks for classes and airplane tickets on my credit card and pay it off monthly to build credit.

#3: Your New Credit

While it may be tempting to sign up for all the department stores and bank credit cards, opening too many new accounts in a short period of time can hurt your credit score.

When you apply for a new line of credit, lenders will check your credit information with a hard inquiry or a hard pull. I recently learned that hard pulls can cause a temporary decline on your credit score. The score assumes that opening more lines of credit could lead to greater credit risk.

Stacey advises to not apply for credit just to receive a discount on a purchase. "Every time you apply for a credit card, it shows up on your credit report and lowers your score," she explains. "Hard inquiries stay on your report for two years, but only impact you score for the first 12 months."

If I could go back in time, I would tell all my friends after we graduated from college that opening new credit cards can hurt your credit score. I remember I had a handful of friends open two credit cards at once to get different perks offered by banks and retailers. We all had no idea that this could actually hurt your credit! For my college or recent grad friends, if you want to open a new credit card, please remember to only open one a year!

#4: Types of Credit Used

Did you know that the different types of credit you have help determine your credit score? According to BECU, having both installment (example: a loan with monthly payments) and revolving credit (example: a credit line of $10,000 for you to use on your credit card) shows you have experience.

Honestly, I was really nervous to take out an auto loan. I already have student loans but my high school car was on the brink of death so I knew I had to buy a new car. Now I'm realizing that having an auto loan actually diversifies the type of credit I have. My BECU credit card is my revolving credit and my BECU auto loan is my installment credit.

#5: The Amount You Owe

Your credit score also factors into your credit utilization ratio - this measures the debt amount vs. your available credit limits. If you have a lot of debt, it can impact your credit score. But, you can improve your credit score over time by paying down the debt you owe.

When I first found out that the amount of debt you have impacts your credit score, I was worried. I have an auto loan and student loans I've been paying down. But your credit score also factors in if you're paying your debts on time as well as the types of credit you have. So don't fret if you're paying off student loans and auto loans like me, just remember the other factors that you need to take care of to maintain a healthy credit score.

There you have it friends - the five things that factor into your credit score!

I'm about five years out of college, so I'm looking to pay off the rest of my student loans and start saving for a home these next few years. I know my credit score is going to play a key role in getting a lower interest rate on my future mortgage. My priority these next few years is to continue to maintain my credit score by prioritizing my financial health and well-being.

If you're ready to learn how to build good credit, you can check out BECU's Building Credit article. Additionally, if you're a current BECU member, you can also check your FICO credit score for free. To check your credit score, you have to log onto your online banking and click on the "View Your FICO score for Free" icon and link!