Understanding a credit scoreOct. 15, 2019
October is National Credit Awareness Month. Do you know what a good credit score is, what makes up your credit score, and what is listed on your credit report? Reviewing these items a few times per year is the best way to keep on top of your credit.
Credit score ranges
Credit scores are issued by the three main credit bureaus. Equifax®, Experian®, and TransUnion® use a range of 300 to 850 for your credit score. Lenders can use one or all of the three credit bureaus to help determine whether or not they will issue a loan. You also may see FICO® or VantageScore®, which are based on information from the three credit bureaus.
TruMark Financial uses FICO® Score 8 based on TransUnion data, which may be different from other scores. Here are the ranges FICO uses:
|Exceptional||800 or higher|
|Poor||579 or lower|
The higher your score, the easier it will be to get new loans and, likely, lower rates on those loans.
How are credit scores calculated?
Credit scores are determined by five factors.
- Payment history (35%) – Payment of past debt is a major factor in determining how likely a new loan or line of credit will be paid. If late payments are made on credit cards or loans, lenders are obligated to report them to the credit bureaus. Always make at least the minimum payment on loans by the due date.
- Credit Utilization/Amounts owed (30%) – Credit utilization is a ratio of the amount of money owed vs. the amount of credit available. For example, if you have five credit cards, each with a $2,000 limit ($10,000 total limit), and one has a balance of $1,000, your credit utilization is 10%. Best practice is to keep this percentage below 30% or $3,000 for this example, across all five cards. The percentage can be affected by limit or balance increases, and whether a card is closed. If one card is closed, the utilization ratio would then be 12.5% ($1,000/$8000), which could cause a credit score to go down.
- Length of credit history (15%) – Contrary to popular belief, this is not how long you’ve had credit. The length of credit history is the average of how long each account has been open. If you got a car loan 10 years ago when you were 18, and a credit card 5 years ago at 23, the length of credit history is 7 1/2 years.
- New credit inquiries (10%) – Each time an application for credit is made, it’s added to your credit score. Credit inquiries can include those from loans, credit cards, cell phone providers, and more.
- Credit mix (10%) – The types of credit you have. Credit cards are an open line of credit, whereas a student loan or mortgage have a finite amount left on the loan and a firm payoff date. Having different types of credit helps to increase your score.
How to get your score
Checking your own score is known as a “soft inquiry” and will not affect your score. If you are a TruMark Financial credit cardholder, free access to your FICO® Score is available in online banking and is updated quarterly. You also can request your score from the three major credit bureaus for free once per year.
I know my score – now what?
Now that you know your credit score, you can decide if it’s a good time to apply for a new loan or credit card, or start improving your score. The best way to improve your credit score is to make payments on time. Set up automatic payments on loans, credit cards, and utilities when you can and use phone or calendar reminders for your due dates.
In addition to paying on time, paying down credit card and other balances will decrease credit utilization. Remember, less than 30% credit utilization is considered good, but the lower that percentage the better. When taking out a large loan, such as a mortgage, lenders will look at all of your minimum payments on loans and credit cards versus your income to determine your debt to income ratio. This ratio could decide whether or not you qualify for a mortgage.