18 Feb

The Ultimate Guide to Credit Scores

Credit Score Tips

The talk of credit scores often surrounds finances, but how many of us know how they’re calculated and actually used for? We all know they affect how much credit you can get and that it’s better to have a higher credit score, but how are they calculated? Don’t worry! RMLEFCU has compiled a handy guide on what your credit score is, how it’s calculated, and how to raise and keep your credit scores high. Read on to find out!

What is a Credit Score?

Let’s go to the very basics and understand what a credit score is. It’s a three-digit number that is basically a grade for how well you have managed loans, lines of credit, and other financial obligations over the years. Banks and lenders use it to decide whether they’ll approve you for a credit card or loan.

There are three main credit bureaus; Equifax, Experian, and TransUnion, that create your credit reports with credit scoring models like VantageScore and FICO. These models are used to come up with a score that ranges from 300-850.

It’s also not uncommon to have multiple different scores at the same time, with the numerous ways to calculate them. You can have different scores if a lender doesn’t report to all three credit bureaus or reports updates to them at different times. You could also have different scores depending on the what loan or car you’re applying for. For example, an auto lender might use one scoring model, while a mortgage lender uses another.

This might be confusing, but not to worry, these scores are calculated on a similar basis, which leads us to our next question.

How are Credit Scores Calculated?

We’ve touched base on how important these scores are so let’s get to how they are calculated so you understand the works of your score. All scores are calculated differently, however, they generally consider similar factors such as:

  • Payment history (35%)
  • Debt usage ratio (30%)
  • Credit history age (15%)
  • New credit (10%)
  • Credit mix (10%)

Your payment history is the payment records of car loans, mortgages, retail accounts, installment loans, credit cards and more. It’s critical to make sure your payments are on time because late payments and accounts sent to collections can have a significant negative impact on your score.

Your debt usage ratio calculates the total amount owed on accounts in relation to the total credit limit. A general rule is to keep your balance below 30% of the total credit available.

Length of credit history looks at the age of your accounts, the number of recently opened accounts, and new credit vs. established credit.

New credit/inquiries are also considered in your score and the calculation consists of the number of recent inquiries, the time since an inquiry, the number of recently opened accounts, and the time since opening an account.

Additionally, having a balanced credit mix is also important for your score. These accounts include credit cards, installment loans, mortgages, consumer finance accounts, and more. A mix of credit types can have a more positive impact on your credit scores than a credit report that shows only one type of credit.

How Do I Increase My Credit Score?

Now that you know what a credit score is and how it’s calculated, it’s time to understand how you can increase your credit score.

The most impactful way to improve your score is through your payment history. Your scores are affected greatly by this factor, contributing to 35% of the score calculation and has the greatest effect on improving your scores, but missed or late payments are not easily fixed. If you already have missed payments, it’s best to get up to date with your payments and stay current. The longer you keep up with on-time payments, the more your score should increase. The impact of prior credit problems will fade over time as long as recent good payment patterns show up on your report.

The second largest factor contributing to your credit score is the debt usage ratio, contributing 30%. It’s best to keep your balances low on credit cards and other revolving credit. High outstanding debt can affect a credit score and it’s best to pay off debt rather than moving it around. It’s also unwise to open a number of new credit cards that you don’t use just to increase your available credit limit or to close unused credit cards as a short-term strategy to raise your scores.

Need help building up your credit? RMLEFCU offers a Credit Builder Loan to rebuild your credit score if it is damaged or non-existent. You don’t need to put down any money to secure the loan and there are low monthly installment payments, making it easy to get your score up!

If you would like to open a new line of credit with RMLEFCU or help rebuild your credit with a Credit Builder Loan, don’t hesitate to contact us or visit a branch.

06 Feb

Understanding Home Equity Lines of Credit (HELOC)

HELOC on laptop computer

Sometimes life throws you curveballs like needing to update your kitchen or fix a leaky roof. Home improvement projects are rarely cheap, but a HELOC is great for providing you with the funds you need to get them done. RMLEFCU has competitive, variable rates for several recurring or one-time needs consisting of major life events, home remodel projects, debt consolidation, and more!

But before you get into signing the papers, what exactly is a HELOC? Don’t worry, we’ll explain everything so you can become an expert on Home Equity Lines of Credit and fix up your home!

What is a HELOC?

A HELOC or a Home Equity Line of Credit, allows homeowners to borrow money against the equity they’ve built up in their home, which is the difference between your home’s value and your mortgage balance.

HELOCs can provide numerous opportunities for flexibility in borrowing; however, they are limited and carry the risk of foreclosure. Opening a HELOC can require considerable discipline, but we’re here to help keep you on track.

How does a HELOC work?

A HELOC is similar to a credit card where the borrower uses a line of credit to borrow amounts that total no more than the credit limit, instead of advancing the entire sum up front.

HELOC funds can be withdrawn during the “draw period” which typically ranges from five to 25 years. After the draw period comes repayment which consists of the borrower repaying the amount withdrew plus interest. There may be a minimum monthly payment required during the draw period which often consists of “interest only”.

What is the length of a HELOC term?

The length of a HELOC can vary up to 30 years, with a 10-year draw period and a 20-year repayment period. While borrowers can choose to withdraw the available money immediately, lenders can structure HELOCs as long-term relationships.

At RMLEFCU, our HELOC repayment terms are up to 15 years and your funds are available anytime, without reapplying. You only need to apply once and can use it repeatedly thereafter.

Are there any additional fees?

Annual fees can be included in HELOCs, including other fees such as transaction fees and closing costs. A lot of the terms and fees included with your HELOC are determined by the individual lenders. You will also pay interest on your HELOC. Most lenders offer a variable interest rate.

If you make interest payments with RMLEFCU’s HELOCs, those payments may be tax deductible.

Are there alternatives to a HELOC?

Home equity loans and HELOCs sound similar, but these two products are actually very different. Some of these differences might determine which option is better for your needs.

A home equity loan doesn’t allow for revolving borrowing, like the HELOC. Instead, the borrower gets all the money in a lump sum, up front, and spends the life of the loan repaying it. A home equity loan also carries a fixed interest rate, which can provide more security over the life of the loan. This may allow borrowers to plan more easily when putting together a budget for the loan’s repayment schedule.

RMLEFCU also has a home equity loan option with similar attributes to our HELOC loan! Depending on what you need the loan for, you should research which one will benefit your needs the most.

Call us today to discuss our low HELOC rates and put your home’s equity to great use! (303) 458-6660