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Your Credit Score Explained

Your Credit Score Explained

Having a good credit score is an essential factor in living a healthy financial life. But what is a credit score, and how can you build it? We’ve got the answers so you can understand just what it takes to be top of the class.

Your credit score is a three-digit number that is calculated using your credit report. It examines whether you pay your financial obligations and helps lenders determine if you’re a good financial risk. That means it weighs heavily on whether you’ll be eligible for a loan (such as a credit card, mortgage, or auto) and your interest rate on that loan.

From housing to cars and even jobs, your credit score has a significant impact on your life. There are a multiple of credit scoring companies, including FICO. So, let’s see exactly what they’re looking for and how you can improve, maintain, or boost your score.

A credit score is made up of five components:

  1. Payment History (record of paying bills on time) is 35% of your score and is an excellent place to begin your evaluation.
    • Pay bills on time. Even being just 30 days late can damage your score.
    • Use products like Bill Pay to set automatic payments to help you stay on track.
      • If you have not kept up on your payments, don’t get discouraged and start now. It takes work to improve your score, but with diligence, you can!
  2.  Amount Owed is number two in the category of importance, at a whopping 30% of your score. FICO considers your credit utilization ratio, which simply means how much debt you have compared to how much available credit you have.
    • Owing something and paying it back shows a lender that you’re responsible with your finances.
    • Be aware of the amount you owe in total, but more importantly, stay on top of how much you owe. It looks more impressive to lenders if your balance is $400 on a credit card with a $5,000 limit versus if your balance is $4,500 on that same credit card.
  3. Length of credit history is 15% of your score. The longer your credit history, the better shape you’re in. If you are new at attaining and managing credit, you can make positive strides so long as you keep your balances low and paid on time.
    • If you have an old credit card you no longer want to use, and it doesn’t have an annual fee, keep it open regardless, as it can still improve your score.
  4. New credit is 10% of your score. While this isn’t one of the more significant components, it’s important to pay attention to it.
    • When looking into opening a new credit card or loan, the lender pulls your FICO score, which is called an inquiry. If you’re applying for several credit cards or loans within weeks of one another, they get several inquiries, which can be interpreted by FICO as you needing money quickly, and thus can make you appear more of a financial risk.
  5. A Mix of Credit is 10% of your score. A variety of credit is considered when calculating your credit score. Do you have credit cards, store accounts, auto loans, installment loans, or mortgages? Since this component doesn’t carry a lot of weight, don’t stress if your credit mix doesn’t represent each of these categories.

If you want to learn ways that we can help you build or repair your credit, schedule an appointment at one of our local branches and one of our Member Experience Specialists would be happy to assist you.