Understanding Your Credit Score

In a previous article, we dove into the components that make up your credit report, and the importance of maintaining positive credit history. One of the most critical pieces of your credit report is your credit score. Your credit score has tremendous weight on the type of credit you may be eligible for, as well as the price you’ll pay for that credit. The higher the credit score, the more likely you’ll have access to favorable loan rates and terms.

Your credit score is a three-digit number that represents your creditworthiness. In the simplest of terms, it gives lenders an idea of how timely you are in repaying your loans and bills. It is also used by many lenders, including Dutch Point Credit Union, to determine the interest rate you’ll pay on a loan or credit card. Most scores range from 300-850, and they can change frequently depending on changes in your credit report. The three major credit bureaus - TransUnion, Experian, and Equifax – each use computer software developed by a company named FICO to calculate credit scores. Because each bureau could have different information about you on their credit report, your credit score can differ with each one (but should generally be close to one another among the bureaus). This is why it’s important to periodically review your credit from each of the three credit bureaus.

Credit scores are calculated using five major factors. Let’s review each one.

Payment History (35% of your credit score)
Payment history plays the biggest part in determining your credit score. It includes payments on installment loans, credit cards, mortgages, student loans, and more. Good payment history has a significant impact on increasing your credit score and maintaining a high credit score. One late payment can have a serious negative impact to your score, which can go down much faster than it can go up.

Amounts Owed, aka Capacity (30% of your credit score)
We all know it’s important to pay your bills on time and have good payment history, but did you know the second most important piece of your credit score is how much total debt you owe? If you have large balances on multiple installment loans, or your credit cards have high balances in relation to your credit limits, your score can be reduced. Maxing out your available credit can appear to a lender that you owe more money than you can handle. As a rule of thumb, it is recommended that you only ever use 50% or less of the available credit you have.

Length of Credit History (15% of your credit score)
How long your credit has been established has weight on your credit score. Lenders typically want to see reliable on-time payment history over a long period. In this case older is better – that’s why it’s important to begin establishing credit as early on as you can. If you’re just getting started with credit or want to start building on your limited credit history, let Dutch Point Credit Union help you with a small credit card or secured loan.

Amount of New Credit (10% of your credit score)
It’s important to space out any new credit you open, rather than open several new accounts at the same time or within a short time period. Lenders might think you’re running into financial difficulties if you’ve opened too much new credit too quickly. It’s also important to limit the number of credit inquiries you have for the same reasons. Too many inquiries can signal to a lender that you’re shopping excessively for credit. Even if a lender pulls your credit and you don’t end up with a loan from them, that inquiry will remain on your credit report for two years. Only get your credit pulled if you absolutely have to.

Mix of Different Credit Types (10% of your credit score)
Not all credit is created equal. It’s important to have a healthy mix of different types of credit, which shows a lender that you can be responsible with various credit options. It is recommended that you have a mix of revolving accounts (like credit cards and lines of credit) and installment accounts (like car loans, personal loans and mortgages).

Now that we’ve reviewed what makes up your credit score, here are some tips to help you improve or maintain your score:

• Don’t take on more than you can handle. Be sure to have a good grasp on your monthly budget before you apply for new credit, considering what effect a new loan payment could have on your monthly finances.
• Sign up for automatic payments for your Dutch Point loans to keep your payment history in good standing.
• Keep your credit card balances at or below 50% of your card limits.
• You benefit more from leaving a credit card open with a zero balance than closing a card that you aren’t using. If you don’t intend on using the card anymore, shred it but leave the credit line open. Again, the more capacity you have to take on additional debt (but don’t choose to) shows financial responsibility to a lender. If it’s an older card, it also helps with your length of credit history.
• Remember to limit the number of inquiries on your credit.
• Open new accounts sparingly and only when needed.
• Be mindful of all of the components that make up your credit score when thinking about taking on new debt. New credit can temporarily have a negative impact on your score, but if the new credit is handled responsibly your score will bounce back quickly.

Your financial health is just as important as your physical health. Dutch Point Credit Union’s personalized credit review program allows you to get an annual check-up on your financial fitness. You’ll get a line by line consultation of your credit history and walk away with advice on how to maintain your credit score or improve it if needed. Learn more and sign up for your personalized credit review today.