Credit 101

Do you know your credit score? Many people don’t. Those three numbers between 300 and 850 can make a huge difference in how much interest you are charged for loans and can impact your ability to buy a car, a house, and even get insurance. (Don’t worry. Maryland Auto doesn’t use credit scores to determine eligibility or your premium rate.)

Your credit determines whether you’ll be approved for a loan and what interest rate you will be charged on that loan. The lower your credit score, the higher the interest charges you will pay to the lender. Higher interest means you pay back more, overall, on the loan.

Insurance companies may charge higher premiums for customers who have lower credit scores. In addition, although utility services, such as gas, electricity, or water, can’t be denied based on credit, providers may require large security payments from customers with a low credit score before they will provide services.

Related: How Much Does Credit Score Affect Auto Insurance Rates (Experian.com)

Credit rating companies such as Equifax, Experian, and TransUnion, use several criteria to calculate your credit score. Factors like payment history, late payments, collections referrals, the number of new lines of credit you’ve opened, and what percentage of your credit limit you are currently using can determine whether your score goes up or down.

What makes a “good” credit score?

Each credit rating service has their own scale to determine what good credit looks like. However, on the 300-to-850 scale, a score of at least 670 (for FICO®) and 700 (for VantageScore) will typically qualify as having good credit.

A FICO credit score is determined by the following:

• 35% – Payment History: Do you pay your bills on time?
•  30% – Utilization: Are you maxing out your lines of credit or not?
•  15% – Established History: What kind of history do you have with creditors? The longer you maintain open accounts with creditors, the better.
•  10% – Credit Inquiries: Are you filling out multiple inquiries to take out credit cards or other loans?
•  10% – Mix of Credit: Do you have multiple lines of credit such as credit cards, auto loans, home loans, etc.?

Here’s a video from FICO with more information.

Like a good soda formula or chicken recipe, some rating providers like to keep their method for compiling scores a secret. VantageScore looks at many of the same items as FICO, but may potentially apply a different weight to each category to determine your credit score.

Here’s a video from VantageScore about their scoring system.

First, you need to find out what your score is. Many banks offer free credit score updates as part of their membership services.

Each of the three major credit rating services, Equifax, Experian, and TransUnion all offer free credit check options when you create a membership account on their site.

But you want to be careful. Too many inquiries or credit checks can also affect your score, negatively.

If your credit score is not as high as you’d like, one way to improve it is by paying your bills on time in the amount agreed upon. This includes not just credit cards, but all of your bills. Keeping credit card balances low rather than maxing out your cards every month will improve your score.

Here are some resources on fixing and repairing your credit:

Credit Repair: How to “Fix” Your Credit (Experian.com)

Fixing Your Credit (Federal Trade Commission)

How To Improve Your Credit and FICO Scores (MyFICO.com)

See below for several resources for non-profit credit counseling, including our program partner, Consumer Credit Counseling Services of Maryland and Delaware (CCCSMD.org)

Applying for a secured credit card or becoming an authorized user on someone else’s credit card (who has good credit) may help positively build your credit score.

What is a secured credit card?
A secured card requires a refundable security deposit which serves as collateral on the account. Because the deposit reduces the risk to the issuer, you more likely to be approved for this card. Using a secured credit card and paying on time can help build your credit and make you eligible for an unsecured credit card.

Related: What Is A Secured Credit Cards and How Is It Different From an Unsecured Card? (NerdWallet.com)

Related: Best Secured Credit Cards – November 2020 (NerdWallet.com)

What should I know about the refundable security deposit?
The security deposit you make typically determines the amount of your credit limit. If you don’t pay your bill, then the company will use your deposit to cover the bill. If you cancel your card, the card issuer will refund your deposit less any money left on your credit card balance.

Will people know that I have a secured credit card?
No. This works just like any credit card.

This sounds great! Are there any downsides?
Unfortunately, yes. While this is a tool to help you build credit, many of these cards come with fees along with higher interest rates than unsecured cards. The credit limits also tend to be low, meaning you won’t have the spending power that you would with an unsecured credit card. You will need to check carefully to see what fees are charged and when before signing up for a secured credit card. Check to see if there are any application fees, maintenance fees, processing fees, or any other cardholder fees. You will also want to check that the card you are signing up for will report your payments to any of the consumer credit bureaus. Otherwise, it may not help you build credit.