How to Know and Grow Your Credit Score

Credit scores range from 300 to 900, with your score dictating your credit impact. There are three primary credit reporting agencies (Experian, Transunion, and Equifax) and a multitude of credit monitoring services such as Credit Karma, LifeLock, and even your credit card company. These agencies report to analytics software company FICO (Fair Isaac Corporation) that continually updates the credit calculation formula based on several factors.

Credit Score Factors

The newest version at time of writing is FICO Score 10, though most lenders still utilize FICO Score 8 which is more forgiving of isolated late payments and rewards lower credit card balances. There are five primary factors that FICO considers in their calculations, with approximate percentages of impact. As we discuss these primary factors, please be sure to red up on your personal credit score and history by trusted sources like Experian and “My Credit Score”, TransUnion and “What is a Credit Score?”, and “Understanding Hard Inquiries on Your Credit Report” by Equifax. Understanding your credit score will help you know how companies will ultimately determine your overall credit impact, and thus the offers you receive. 

  1. Payment History (35%): Reflects making your payments on time, as late payments and missed payments are reported.
  2. Accounts Owed (30%): This refers to how much money you owe compared to how much you have available. Keep your utilization under 30% for best results.
  3. Length of Credit History (15%): The longer you keep your accounts open, generally the better your score.
  4. Credit Mix (10%): A good mix of accounts is important, between credit cards, personal loans, vehicle loans, and mortgages. Your goals should be to have 5 different accounts.
  5. New Credit (10%): Running credit several times indicates risk to a bank, as does opening several new accounts in a short period of time.

So, now that you know how credit scores are calculated, how do you build, maintain, or rebuild your personal credit score?

“We work with all levels of credit every day, and we’ve seen it all. When someone has challenged credit, many times we’re able to help them get back on the road sooner with a better car and lower payment. And almost always, the credit score isn’t the whole picture that our lenders look at for success.” Vito Ballestrasse, General Sales Manager

First Time Buyers

There are a few things that are important to know when applying for your first credit card. Creditors will want to know how long you’ve been at your job and your annual gross (not net!) income. What’s the difference between gross and net income?

Gross refers to your total pay before taxes and other items are taken out, and net refers to your take home pay after everything is paid.

An easy way to remember this is that, if you were fishing, a net can’t hold the entire ocean but it does bring in the fish (gross! but not really). The higher your income, the higher your available credit will be, since creditors expect you to have more to spend.

If you have a 40 hour/week job, you can calculate your gross annual income by multiplying your hourly wage by $173.33, and then adding in any overtime, commissions, or tips you make as well. For example, if you earn $14/hour and work 40 hours per week, and average $100 in tips/week, your gross income would be the following formula, then add in any bonuses, commissions, or overtime you are paid.:

A simple formula for first-time buyers: (14 * 173.33) * 12 = $29,119.44

3 Ways to Start Building Your Credit

Get Added to a Card

Most people won’t have this option. But if you have a trusted family member or friend, they may be able to add you to their credit card as an authorized user. I know what you’re thinking when it comes to that, but keep in mind they also have to trust you (trust is the basis of all healthy relationships). If they use that card incorrectly miss a payment or have a high balance it can affect your credit negatively. Be selective, as they need to be as well.

You can get added onto more than one card as well. One of the ways parents can help their children succeed early on is by adding them to a limited credit card and then teach them how to buy and pay off debt the responsible way. It’s never too early to start financial training for your kids. Do this early, and by the time they’re ready to purchase their first vehicle on their own, their credit score will warrant better terms. 

Apply for a Secured Credit Card

Your most powerful accounts are going to be unsecured debt, but opening a secured credit credit card with your credit union is a great option if you’re just starting out! This is also the best option if you’ve been at your job for less than one year or work part-time.

You will want to request a minimum of a $1000 limit. When you have no credit and a short time on your job, avoid credit cards with annual fees because that gives you an instant balance that you have to pay off quickly.

This is also a popular option for parents who want to teach their children how to build credit and spend wisely. If you do not opt to allow another signer on your credit card, help them find and secure their first line of credit and then train them how to spend properly. Again, the earlier you can teach your children how to succeed financially, the sooner they will be able to thrive on their own as young adults. 

Apply for an Unsecured Credit Card

Not everyone is going to need a secured credit card (If you have been on the job for 1+ year and no delinquent payments on your credit, you can confidently apply for an unsecured card.)

Consider a Personal or Student Loan

Personal loans are difficult to get, but if you look for one, apply after having a credit card (between three and six months after you receive your line of credit). Student loans are easier to get, but being a student limits who can or can’t get one. 

How to Maintain Credit in Five Steps

Once you build your credit, you’ll want to protect your score at all costs. These are some of the most helpful ways to do this: 

  1. Pay your bills on time.
  2. Keep your revolving credit under 20% utilization. Pay them early to do this, or open up another credit card to increase your overall limit.
  3. Have a minimum of 5 accounts. It’s best to have different types of loans, not just all credit cards (think auto loan, personal loan, credit card).
  4. Look at refinancing but don’t refinance your auto loan more than two to three times.
  5. Don’t run your credit often. It doesn’t affect your credit too much, but creditors don’t like seeing that you’re moving around — they want the relationship long-term

Freezing your credit may help you.

One surprising way to maintain your credit is to place a freeze on your credit bureaus. A credit freeze makes it difficult, if not impossible, for new accounts to be opened until you unfreeze it using secured methods that you establish. When you go to apply for a new loan, you will want to unfreeze your credit for a specified amount of time or until your lender gives you the green light with an approval. 

Figuring out how to unfreeze your credit can be frustrating, but below are the links to get you started. Typically you will want to unfreeze your credit for at least 48 hours, or until you have a green light that your loan or lease is approved.

Experian is one of the easier ones to unlock and does not require a login, unless you pay them for additional member services above and beyond the standard credit freeze. You have to create an account with Transunion, but after that it’s very simple to freeze and unfreeze. Though banks don’t look at Equifax often, there are times when it is necessary. You have to create an account, but after that it’s very simple to freeze and unfreeze.

Solving Credit Challenges

Let’s say you find yourself with under a 600 credit score, but you’re looking to buy a car soon or refinance your home. There are ways to solve your credit challenges, just like there’s a way to build credit.

First Step to Solving Credit Challenges

Identify why you have the credit challenge to begin with; you might be surprised. There could be a medical bill, a tax lien, things that might not even be notified about. A thirty day late on a card you thought you’d closed out with a zero balance. Or it could be that you have a high balance because you consolidated your loans onto one card. Maybe you haven’t had any lates, you just have high balances.

Second Step to Solving Credit Challenges

Stay away from companies that have high annual rates. Examples include FingerHut (no link, intentionally). They prey on people that are looking to rebuild their credit, but they don’t clearly communicate their upfront fees and will leave you with an annual APR in the high 20% range. This can leave you under a mountain of debt and create a situation where $20,000 feels like $200,000.

Are you ready to replace or refinance your vehicle?

BMW Financial

BMW Financial is very loyal to their customers. Once you have a relationship with them, they will work with you even if you’ve had some challenges in the past. Banks that are represented by the manufacturer (Toyota / BMW / MINI / Mercedes / even Ford!). They don’t just base it on score, but also the relationship you’ve built with them. Conventional banks might just look at you like a number. We have an amazing in-house finance team that will work with you to make certain you have the best terms possible. 

MINI Financial Services

MINI Financial Services understands that bad things happen to good people and they’re all about a second chance. They’re fighting the giants and want to compete with their big brother (BMW). Once you’re approved with MINI, you’ll get the same interest rate if you have a 600 score or an 800 score.

College Grad Program

If you’re a first time buyer and graduated college within the last year, currently have a job and have no late payments on your credit history, BMW and MINI have a special lease and buying program for you with additional incentives.

First Time Buyer Programs

Many credit unions offer special programs for first time car buyers, to help them get on the road to success. As a Credit Union Direct dealer, we have access to hundreds of credit unions to ensure you get the best rate possible no matter your credit situation.

What will you do with your credit score?

Whether you are a first-time buyer or someone who is looking to purchase a new or used BMW or MINI, you now understand that there are several aspects to your credit score and these directly affect your ability to receive a good line credit. We’ve encouraged you to start thinking about these aspects before you think about purchasing your next vehicle as well as talk through these with your children (if you have kids) as a way to instill good financial habits and values before they look to purchase one of their own. You know now how to build good credit, freeze lines of credit, and solve problems on your own.

So the big question here is: how can we help? We would love to see you in person, but if you would like to start the process online, you can always start with our Virtual Showroom at BMW or MINI. Until then, let’s work together as partners and improve your financial situation.