Everything You Need to Know About Credit Scores

Think of your credit score as a log or snapshot of your credit and borrowing history. The information it captures influences your approval and interest rate for things like mortgages, car loans, and credit cards. Your credit score and report can also come into play when it comes to renting a home or getting a job. With all that in mind, it’s critical to understand how credit scores are calculated, what a good credit score is, and how to improve it.

How Credit Scores Are Determined

Your credit score is a number used to rate your credit history. It tells lenders how responsible you are as a borrower and how likely you are to pay future debts on time. The better your history of repaying debt, the better your credit score. Many companies calculate credit scores, but they all generally weigh the same criteria:

What’s a Good Credit Score?

While there are several credit-scoring formulas, the FICO® Score is used by 90 percent of the country’s top lenders.¹ Scores range from 300 to 850 and are often categorized by quality, such as good, fair, and poor. As such, scores under 580 typically indicate very poor credit, and scores above 670 demonstrate good, responsible borrowing habits. While score ranges may vary by lender, here’s an example of how scores may be broken up:

How to Improve Your Credit Score

Your credit score will change if there are any changes to your credit history. To help improve it, here are a few tips:

• Keep your balance low. Keeping a low credit utilization ratio is good for your credit score. A credit utilization ratio compares your credit balances to your credit limits (or how much of your available credit you’ve used). Ideally, try to keep your utilization ratio below 30 percent.

• Always pay your bills on time. Making a habit of timely payments can improve your credit score over time. You can automate the process with payment scheduling services such as LibertyOne’s Bill Pay Program.

• Review your credit report for mistakes and request corrections. You can order one free report per year from each of the three major credit bureaus (Equifax®, Experian® and TransUnion®) by going to www.annualcreditreport.com.

 ¹Source: myFICO, “Understanding FICO Scores."

Debunking Some Credit Score Myths

Myth: Keeping a small balance on your credit cards is helpful to your score
Not only is this false, but keeping a balance on your credit cards can also hurt you financially due to the interest rates charged by creditors. In reality, your best bet is to pay your balance in full each month when possible, or at the very least more than the minimum due. And, if you’re carrying a balance, always pay your credit card bill on time.

Myth: Closing a credit card with a high-interest rate will enhance your score
The average age of your cards is an important factor used in calculating your credit score. While it may seem like a good idea to close your higher interest rate cards, it could actually hurt your credit score by lowering your credit age if that card is one of the older cards you hold.  Another important item is the percentage of your total credit limits that are available. Sometimes it pays to have cards with 100% of the limit available as it increases your overall available credit. When it appears you have very little credit available, it can decrease your score and also deter lenders from loaning you money.

Myth: Opening a new retail card improves your score
Sometimes a retail card can be beneficial to people trying to build—or rebuild—credit. However, if you’re adding a new card when you already have credit established, the additional line of credit will recalculate the age of your credit score and could make your score dip lower. Remember—retail cards often come with higher interest rates, and paying off your bill in full may be more difficult. If you’re looking to build credit, opening a secured credit card from LibertyOne Credit Union may be a better option.

Myth: Co-signing on a loved one’s credit account won’t affect your credit score
When you co-sign for a friend or loved one, your credit is tied to the account. If your co-signer misses payments or defaults on a loan that includes your name, it will bring down your credit score. Make sure you trust that payments will be made on time each month before you agree to be a co-signer.

Following these can help you to live a more comfortable financial lifestyle:

1. Live within your means

2. Spend wisely

3. Free up funds to cover expenses

4. Build emergency savings

5. Avoid too much debt

6. Manage existing debt

7. Save for retirement

8. Know when to get help

Some Financial Questions You May Have

How much should I have set aside in case of emergency?
Most experts recommend three-six months of necessary expenses. The easiest way to figure it out is to ask yourself this: If I was out of work, how much money would it take to get me through three to six months? Think of things like the necessary, regular expenses you have (food, housing, utilities, transportation, etc.), and not the $400 you’d like to spend on a free-for-all shopping spree—that doesn’t count.

How much should I be saving for retirement?
Obviously, there are several factors that might determine this for you, but experts generally recommend 15% of pre-tax income, and that includes anything your employer puts in. So, if you make $40,000, it is recommended you have at least $6,000 a year going into savings. If your employer puts 5%, or $2,000 in, then you would take the other $4,000 out of your check to go towards your retirement. This is about $333 per month. 

What’s the most important thing I can do to reach my financial savings goals?
Pay yourself first! Have your employer take money out of your check before you ever see it. Most employers will automatically transfer those funds wherever you would like them to go. If your employer is unable to do this, then you should set it up on Online Banking or call LibertyOne and we will set up an automatic transfer for you that comes out right when you get paid.

Which credit cards should I pay off first?
Some recommend focusing on the cards or other debt with the highest interest rate. Others suggest starting with the debt with the lowest balance and working your way up. Which one is better for you depends on your individual financial situation but both are good methods of getting debt taken care of more quickly. 

7 Ways to Pay Less for Life Insurance

Buying life insurance may be less costly than you think, particularly if you follow some fairly simple steps to keep your premiums down. Research from LIMRA, a membership organization for life insurers, shows that despite record-high consumer intent to purchase coverage, “too many Americans mistakenly feel life insurance is financially out of reach or too difficult to obtain.”

If you’re looking for a policy that won’t break the bank, while still covering your loved one’s expenses after you die, a number of moves can allow you to score the lowest rate you can.

Buy a term policy

Permanent life insurance, such as whole life coverage, provides lifelong coverage, along with a savings component of a policy known as its cash value. But you’ll pay a price for those advantages. A permanent policy can easily cost three to five times as much as buying the same amount of term life insurance, says Barb Pietrangelo, a financial planner and insurance expert at Prudential. On average, term life policies cost only about $165 per year, LIMRA reports.

As the name implies, term life insurance covers you for a defined period, typically between 10 and 30 years. Select a term length that will cover the years your family will most need protection. That might be the time until your children reach adulthood or your mortgage will be paid off.

While you should be careful not to choose a term that’s too short, there’s a financial incentive to not buy longer coverage than you really need. The longer the policy term, as a rule, the higher the annual premium.

Get insured when you’re still young

The main reason to buy life insurance earlier in life is that, as a rule, the younger and healthier you are, the lower your premium. Taking out a policy in your 20s or 30s — when you’re less likely to suffer health conditions like diabetes, high cholesterol or high blood pressure — allows you to lock in the most affordable coverage for the coming decades.

“When you buy life insurance young, your premiums remain the same for the duration of your policy unless you change the coverage amount. This will reduce the total amount you’ll spend on life insurance throughout your lifetime,” explains LIMRA CEO David Levenson.

However, the sooner a term policy begins, of course, the sooner it ends — potentially leaving you uninsured at an age where you still require coverage. If you still need insurance when the policy term expires, most life insurers offer the option to convert your term life policy to a permanent one, says John Buenger, senior financial manager and advisor at the Rice Agency.

Such a conversion, though, will subject you to the sticker shock of a permanent policy. Another alternative for continuing coverage is to take out another term life policy. While the premium will be lower than for converting the old policy to a permanent one, you’ll still pay more than for the original policy, because you’ll be older than you were when you got that coverage.

However, you may not need the same death benefit as you did decades ago, because your kids are out on their own or you’ve retired the mortgage. So you could offset at least some of the impact of your age on the policy’s cost by buying a lower amount of coverage than you originally had.

Quit smoking

The health risks associated with tobacco use mean insurers set higher premiums for smokers than nonsmokers. According to the Centers for Disease Control and Prevention, cigarette smoking is linked to about 80% to 90% of lung cancer deaths in the U.S.

“Quitting smoking can save you a lot of money in the long run,” says David Adler, president of Adler Insurance Group. “If you already have a life insurance policy and have quit smoking, request a re-qualification for nonsmoker rates after you’ve been tobacco-free for at least 12 months.”

Live healthily

Several life insurers offer policy discounts if you exercise or otherwise take good care of yourself, and are prepared to share details about your activity via an app and a wearable monitor such as a Fitbit.

John Hancock’s VitalityPLUS plan is structured much like an airline frequent flyer plan, with premium discounts of up to 25% depending on how many points you accumulate through exercise or by eating well. You’re also entitled to discounts at thousands of grocery stores on a list of approved food types. Health IQ promises comparable healthy living discounts on its policies, and Sproutt says it will be launching a similar offering in the months to come.

Make premium payments annually

How you pay your premiums can help you save money on life insurance, says Ben Reynolds, CEO of Sure Dividend. Paying for your policy once a year, rather than every month, is a less expensive option, he says.

Not everyone can afford to make annual premium payments, but those who can could save up to 5% in premiums, depending on the carrier.

Buy only the coverage your family will need

Purchasing a life insurance policy involves choosing a death benefit amount that will allow your beneficiaries to be financially solvent were you to die. As with determining the right policy term, it’s prudent to buy no more coverage than your family will really require.

The Insurance Information Institute suggests you first take into account other sources of income your family might have access to after your death, such as Social Security and retirement benefits or an employer-sponsored life insurance policy.

Next, add up the expenses your survivors would incur if you died. These could include burial expenses, replacing hidden income — such as work benefits that aren’t part of your wages — or the replacement costs for any services you provide for the family, like tax preparation.

Once you have totaled those numbers, subtract your family’s total income and other assets from that sum. This should give you a relatively accurate picture of how much coverage your family will actually need to be made whole in your absence. This methodology is more precise — and may result in lesser coverage and lower premiums — than some other methods of calculating life insurance needs, such as buying a multiple of your annual income.

Shop around

Finally, as with other forms of insurance, the surest way to find the right life insurance at the right price is to compare what different insurers are offering.

This is something you can do on your own if you already know what you need. Still, you may want to consider working with an independent agent or an online broker such as Policygenius. Such intermediaries can shop for policies from different life insurance companies so you can get the lowest premium, says Adler.