Credit Scores 101
Together Credit Union
Pier Yvette Alsup – Chief Community Engagement Officer
What is your credit score? And, why is it important?
A credit score is a summary of one’s credit, debt, and payment history identified as a three-digit number. Typically, a score can be as high as 850 and as low as 300. This score is designed to represent how likely a person is to pay bills and credit obligation and pay them on time. Higher scores represent responsible payment and credit behavior, which make lenders more confident when evaluating credit requests.
Five key areas contribute to a credit score:
1. Payment History
The first thing any lender or inquirer wants to know is whether you pay your accounts on time. Accounts considered can include bank and retailer credit cards, installment loans such as a car loan, finance company accounts, and mortgage loans. Payment history is the most important factor in your credit score as it typically accounts for 35% of the calculation. Late payments on current or past credit accounts will typically lower your score. Being consistent about paying on time can, over time, have a positive impact on your score.
2. Credit Utilization/Amounts Owed
In addition to the overall amount you owe, your credit score considers the amount owed on specific types of loans such as credit card and installment loans. The percentage of your available credit and the amount you owe and account for 30% of your score calculation.
3. Length of Credit History
In general, longer credit history can increase your credit score, but it’s not mandatory. Your score will consider how long your credit accounts have been
established as well as how long it has been since you used certain accounts. Length of credit history accounts for 15% of your score.
4. New Credit
Research shows opening several credit accounts in a short period of time represents a greater risk, especially for those without a long credit history. How (often) you shop for and open new credit accounts for 10% of your score.
5. Credit Mix
Finally, your score also considers the mix of your credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. This mix accounts for 10% of your score.
So why is a good credit score important?
Employers, insurance companies, utility companies, property owners, and lenders will use your credit score to learn about your habits. The higher your score, the better you appear as an employee, a driver or homeowner, a tenant, or borrower! The better you look typically translates to paying less for insurance premiums, less on utility deposits, and less on loans by receiving lower interest rates and better terms.
For more information on credit scores and credit management, as well as for a list of our upcoming Virtual Workshops including those on investing and college planning, visit our web site at www.togethercu.org or follow us on Facebook.
Together Credit Union is federally insured by NCUA. Membership eligibility required.