What’s in Your Credit Score?

What’s in Your Credit Score?

Credit Score rating based on debt reports showing creditworthiness or risk of individuals for student loan, mortgage and payment cards, concept with business person touching scorecard on screen

645, 825, 525, 750. No, these are not picks for the upcoming lottery… they’re credit scores. While it may be more fun to daydream about winning the lottery than increasing your credit score, it’s important to understand how your credit score affects your financial life – like influencing your ability to rent or buy a home, the cost of credit you’re able to receive, and these days, even your ability to get a job.

In this piece, we breakdown the different parts of your credit score and discuss what affects your score positively and negatively.

How can I get my credit score?

Let’s start with where to find your credit score; that’s easy, it’s on your credit report. And the responsibility for producing these reports falls to three main bureaus – Equifax, Experian and TransUnion. While these bureaus generally charge a fee for reports, you can get a copy from each bureau, once a year, through the Annual Credit Report Request Service (and as frequently as once per week through April 2021 due to the COVID-19 pandemic). It is strongly encouraged to request your credit report from one of these bureaus vs. other third-party alternatives to ensure you receive the most factual reports.

What is my credit report showing me?

Now that you’ve received your report, you may be wondering, ‘what does my score mean?’ Your credit score is a numeric summary of your credit activity and is formulated to predict your credit risk – the risk that you will or will not pay what you borrow. The most commonly used credit rating model is the FICO model, which ranges from 300 to 850. A higher score tells creditors that you are more likely to make good credit decisions and make timely payments towards your debts and other accounts. A good range to shoot for is the 700-750 range as this often leads to easier access to credit and better interest rates.

What financial behaviors affect my credit score?

Your credit score is influenced by five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

  • Payment history is the most important factor in calculating your FICO score. Lenders want to know that you’ve had access to credit and have made payments on time. It’s important to keep your accounts in good standing in order to build a healthy credit history.
  • Amounts owed consists of your outstanding debt. Having debt isn’t necessarily a bad thing, nor does it automatically reduce your credit score. The typical recommendation is to not use more than 30% of your available credit limit.
  • Length of credit history takes into account how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average of all of your accounts.
  • New credit considers how recently and how often you’ve applied for credit. While applying for new credit can improve your credit score (if you follow good credit practices), you want to be careful not to apply for too much credit too quickly.
  • Lastly, credit mix is the consideration of your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don’t worry, you don’t need to have debt classified under each category to have a healthy credit score. This category is simply a review to determine the different types of debt you’re carrying and the associated level of risk.

Want to learn more?

While it may not be the most enticing piece of your financial life puzzle, we hope this piece has helped you understand why it’s important to review your credit report (and score) as part of your regular financial check-up. At Yeske Buie, we’re happy to walk you through your report and/or provide suggestions to help manage your credit score at any time. Never hesitate to reach out with any questions or thoughts you may have – we’d love to hear them!