What's In a Credit Score?

If you’re just beginning to navigate the financial world, understanding your credit score can be confusing. Even for seasoned veterans, the details surrounding credit scores can fall into a gray area.

So What Exactly Is a Credit Score?

Before we dive into what is in a credit score, it’s important to understand what isn’t in one. A person’s income does not factor into their credit score. Likewise for their residence, their length of employment, or their total debt to income ratio.

There is no reason to think that because you have a low income, or are in a new job, that you can’t have a thriving credit score. If you do have a lower score, there are definitely ways to improve it!

A credit score is a number or grade based on a person’s credit history and borrowing patterns. It’s a way for lenders to determine the creditworthiness of a potential borrower by measuring the probability they will pay back their debt.

In other words, the credit score answers the question “How risky is it to lend to this person?”

Your credit score can range from 300 to 850 depending on where you fall on this scale.

Credit Score Scale:

• 730 and up: This is considered an excellent score.
• 680-729: Good to great.
• 640-679: Average to good.
• 600-639: OK for some lenders, but generally below average.
• 599 and below is an indication that your credit patterns could use some adjustments to get back on track.

Credit scores affect a person’s ability to get a loan and what interest they may qualify for. A bad score can even affect their ability to get a home and a job!

What and Who Determine Your Score?

In the United States, there are three credit bureaus: Equifax, Experian, and TransUnion. These three organizations use two different types of credit scores, but the one most people are familiar with is known as the FICO score.

1. Payment History – 35%

This is the largest individual factor. A person’s payment history makes up 35% of their credit score. People with high credit scores make their payments on-time and in-full for a lengthy period of time. Lenders want to make sure that they will get their money back.

By making regular, monthly payments you can keep your score high.

2. Amount of Credit Available – 30%

Another important factor is the amount of credit available or credit capacity. By having high credit limits with low levels of credit utilization, a person can increase their score. What this means is that it is important to not have large amounts of outstanding, unpaid debts.

There are two types of debt: revolving and installment. Revolving debts are those like credit card payments and money borrowed from an unsecured line of credit. High amounts of revolving debt is not good for your credit score. What is good for your credit score is to have high credit limits or capacity. Utilization is the amount of your total limit used that is yet to be paid off. In other words, it’s the balance you carry on a credit card / line of credit (when you make purchases) compared to the limit. Once your payment is made, that credit becomes available again. 

For a better score, keep your credit utilization low.

With every 1% of available credit you utilize, you will lose 1 point from your score. For every 1% of utilization gained, you earn a point. High credit score have low utilization and high limits. For example, if you only use 10% of your credit limit, you can gain 90 points on your overall score.

The other type of debts are installment debts, and these are debts paid off via regular, long-term monthly payments, such as car payments and signature loans.

With installment payments, it’s understood that these are long-term financial commitments. So long as the debt is paid on-time monthly, it will actually increase your score. An installment loan increases a person’s score because it is considered a limit increase. A mortgage is not considered as installment debt and instead is in its own category.

3. Length of Credit History – 15%

The third factor impacting your credit score is the length of time you’ve had credit history.

The longer history you have, the better it is for your score.

Credit scores factor in the consecutive length of your line (or lines) of credit, as well as your average length and the most recent usage. Adding a new line of credit could possibly lower your credit score as it lowers the length of the average. With a low utilization of that line, however, it will, in fact, raise your overall score.

For those new to credit, it will be impossible to reach a perfect score because of the short length of their credit lines. However, your credit score improves quickly even if you have no prior history by making your payments on time.

4. New Credit – 10%

Opening new accounts and pursuing new lines of credit will result in a lowering of your score. This is because opening new accounts means going through a credit inquiry. An inquiry is when an institution checks your score. Financial institutions, car dealerships, and some potential employers will check your credit history when you apply with them.

These credit checks will temporarily lower your score.

5. Mix of Credit In Use – 10%

Finally, your credit score takes into account what types of debt you accrue and the different types of accounts you have.

Your recent history is weighted more than transactions from further in the past.

Ways to Improve Your Score

The worst thing you can do for your credit is miss your payments. People with high credit scores rarely, if ever, miss a payment. Increase your score by paying off existing revolving debts to clear your credit utilization. Increase the overall limits on your credit and avoid closing accounts that have high limits. Closing an account will reduce your score because it lowers the capacity to zero.  

If your credit score isn’t where you’d like it be, or you just want advice on how to add some extra points, contact Florida Credit Union or visit your local branch. FCU offers free credit score reviews and counselling to all members.