The Ultimate Guide to Personal Financial Wellness

Lenders don’t have a crystal ball to tell them whether or not you’ll repay your loan on time. They use your credit score to assess your risk level.

What is a consumer credit report? 

Your credit score is determined by your consumer credit report. This report contains your credit history with a number of institutions, such as banks, credit card companies, collection agencies, and even property rental entities. 

As you repay debts like credit cards, car loans, medical payments, and more, your payments are reported to one or more of the three major consumer reporting companies (Equifax, Experian and TransUnion). 

Your credit report will contain several factors:

• Payment history: Payments you’ve made on debts, and whether they were on time or late
• Length (age) of credit: Your report will show when you opened a line of credit and when you closed it (if applicable)
• Types of credit you have had: This includes installment loans with consistent payments, like student loans, or revolving credit such as credit cards which have variable payment amounts
• Percentage of credit limit used: If you have a $10,000 limit on your credit cards and owe $4,000, you’re using 40% of your credit limit.
• Total balance of your debts: The dollar amount of your combined debts, including installment and revolving debts.
• Recent credit inquiries: These show up when entities pull your credit report after you’ve applied for a loan.

How to get a copy of your credit report

You are entitled to a free credit report each year from all of the three major consumer reporting companies (Equifax, Experian and TransUnion). You can request a copy from AnnualCreditReport.com.

What does my credit score mean?

Your credit score, also known as your FICO score, is a three-digit number between 300 and 850. According to Experian, a score of 670+ is considered good. A score between 580 and 669 is considered fair. A score of 579 or less is considered poor.

A high score means you’re more likely to be approved for the loans you need, such as an auto loan or mortgage. It may also decrease the interest rate for which you may qualify. For example, credit card interest rates for people with a poor credit score are often as high as 21% annually. Someone with excellent credit is likely to find interest rates around 13%.

What affects my credit score?

• Payments you’ve made on credit card bills, student loans, mortgage loans and car loans: When you make payments on time and in full, it affects your credit positively. Late payments will decrease your credit score, especially if you’re late by a month or more. 
• The amount of debt you carry: Your credit utilization ratio—your level of debt as compared to how much credit has been extended to you—accounts for 30% of your credit score. Having a low debt utilization ratio (lots of credit available) is good for your score.
• Credit age: The age of your oldest account is calculated by looking at the date the loan or line of credit was established. This age, plus the combined age of ALL your accounts, is factored in to determine 15% of your credit score. Having older accounts helps your credit score. 

Does paying off a loan help build credit? Oddly, it can do the opposite, as paying off a loan closes the account and removes it from your cumulative credit age. 

• Account mix: Your credit mix accounts for 10% of your score. You have two categories of credit: revolving debts (credit cards) and installment debts (car loans, student loans, etc). Having a good mix of both can benefit your score. Having only one account type is detrimental.
• Collections: Medical bills, unpaid utilities, parking tickets, and even delinquent child support can be sent to collections. Collections on your credit report will hurt your overall score.
• Tax liens: Uncle Sam is everywhere! Unpaid taxes can show up on your credit, dragging down your score.

What can I do to raise my credit score?  

If you found your credit report to be less-than-impressive, you may be wondering how to build good credit. You need a credit building plan!

There are some good ways to build credit without overhauling your finances. Here’s how to establish and maintain good credit:

1. Try loans to help build credit: There are some credit cards that build credit fast. For people with bad credit or no credit, some banks offer a secured credit card that is backed by an initial bank deposit.
   How do you build your credit with a credit card? Making your payments on time, do not max out your credit limit, and leave the account open.
2. Consider building credit with car payments: Wondering how to build credit when you have none? Borrowers with poor credit may be able to secure a partial auto loan by placing a significant amount of cash as a down payment and financing the remainder of the purchase price. Then, all car payments are reported to the credit bureaus, with on time payments possibly boosting your score. 
3. Pay off some debt: Many financial advisors consider this the best way to build your credit score, because your debt level has such a significant impact on your credit. You should aim for 30% credit utilization or less.
4. Keep old accounts open: Even if you don’t use a card anymore, it’s best to leave the line of credit open. Each line of credit contributes to your total credit age. They also decrease your credit utilization ratio.

Remember that the best way to build your credit is to keep it from slipping in the first place. Smart budgeting and discernment in taking on new debt can help you keep your credit score high from the very start.

Choosing a credit card shouldn’t be stressful. Banks offer a variety of credit card types to suit their customers’ unique needs. 

Determine your uses for the card

What purpose will this card serve? Here are some common reasons for opening a credit card, and which types of credit card suit each situation:

• When you need to pay off high-interest debt: Look for a balance transfer card with a lower interest rate or even a 0% APR offer for a period of time. 
• When you need a card to build credit: Try a secured credit card that will report your positive payment activity to credit bureaus.
• When you want some perks: Find a rewards credit card that gives points, cash back, or miles as you use it.

Examine qualifying requirements

Credit card lenders look at factors like your age, citizenship status, and credit score to determine whether or not they will issue a card. Check requirements to see if you’re a good fit.

Compare key terms and fees

Before you sign on the dotted line, make sure you’re in agreement with the fine print. Here are some terms and fees you may see as you shop for a line of credit, and why you should take a closer look:

• Interest rate: Is it subject to change? Is it within a reasonable range for your credit history?
• Annual fees: Most rewards cards charge a fee each year. Sometimes the fee is waived for the first year as an incentive.
• Balance transfer fee: If you’re planning on transferring a debt to your new card, look for a low (or free) balance transfer fee.

Consider what rewards will be most beneficial

To choose a rewards credit card, you’ll need to think about how you’ll be using the card and what kinds of rewards will be most useful. For example, if you do a lot of retail shopping, a rewards credit card that offers points for purchases made on clothing, home decor, etc. might work for you. 

Make sure your rewards suit your lifestyle. Frequent travelers might enjoy airline miles or gas points. Budget-savvy borrowers would appreciate points that reduce their monthly payment. 

Which of the following major credit card categories would be best for you?

Travel Credit Card

Travel credit cards help you earn free travel, gain elite or preferred status with hotels and airlines, and other travel-related perks. If you’re on the road a lot for business or for pleasure, consider a travel credit card to make your journey sweeter.

Student Credit Card

Building credit as a college student is easier with a credit card made specifically for first-time borrowers. They usually have lower credit limits and are sometimes secured by a cash deposit.

Cash-Back Credit Card

This kind of rewards card pays out cash as you use, typically depositing it into your checking or savings account.

Balance Transfer Credit Card

Moving debt from a high-interest credit card to a balance transfer credit card can help you pay your debt faster. This kind of card is generally no-frills, and may carry a balance transfer fee.

Business Credit Card

For borrowers wondering how to build business credit without using personal credit, a business credit card can be a good solution. This type of card is intended for use in business-related purchases.

By carefully considering your financial goals, spending habits, and terms and fees, you’ll be able to select a credit card that enhances your overall financial wellness. Do your research and be sure to ask questions before making any financial commitments.