Credit Score Components: What You Need to Know

Your credit score is a three-digit number between 300 and 850, the result of an analysis of several factors related to your likelihood of repaying debt. The higher the score, the better. According to Experian, one of the three major credit reporting agencies in the U.S. along with TransUnion and Equifax, 67 percent of Americans score in the “good” range or better, with a score of 670 and higher. Lenders, such as banks, loan officers, and credit card companies, use this information to determine the risks involved should they offer credit or lend funds. Typically, a higher credit score will mean more favorable terms for the loan or credit account. So, what does that number mean and how is it calculated? Let’s take a look at credit score components and what you need to know.

PAYMENT HISTORY

Of the five categories of credit information used to determine a credit score, payment history makes up the largest portion at 35 percent. Payment history refers to how and when you pay your bill. Do you make payments on time or after the due date, or have you missed any payments? Does your payment history show any public record or collection activity? Accounts include credit cards, store or department credit cards, auto loans, mortgages, and other loans with regular payments.

WHAT YOU OWE

Thirty percent of your credit score is determined by the amounts you owe. The more you owe, the higher the risk that you might default on that credit with late or missed payments. In addition, using a higher percentage of the credit available to you can have a negative impact on your score, while using a lower percentage could positively impact (even more than not using credit at all). This is known as your credit utilization ratio.

Other factors that fall into this category include how many of your accounts have a balance and the proportion of current loan balances to the original loan amount.

LENGTH OF CREDIT HISTORY

At 15 percent of the credit score calculation, the length of a consumer’s credit history looks at:

• How long accounts have been open, including the age of your newest account and oldest account, and average age of all accounts
• The age of specific credit accounts
• How long since an account has been used

You may want to consider keeping credit accounts open after you’ve paid off the balance, even if it’s tempting to close the account, to maintain longevity.

NEW CREDIT

New credit, which determines 10 percent of your credit score, refers to the number of new accounts you’ve opened or applied for. Credit inquiries stay on your report for up to two years. Don’t attempt to open several credit accounts at once, even if you are just starting to build credit. This will lower your average account age.

CREDIT MIX

The last 10 percent considers your mix of mortgage and installment loans, credit cards, and retail or finance company accounts. Do you have both revolving credit accounts and installment loans? How many accounts do you have (and is that number excessive)? Any closed accounts will still be included.

It’s important to remember that no matter the percentages, the importance of each credit category will vary by person. The score of someone with a shorter credit history is calculated differently than that of a person with a longer credit history, for example.

WHERE TO FIND YOUR CREDIT SCORE

Credit scores can be obtained through a credit score service or free credit scoring site like Annual Credit Report, Credit Karma, or Credit Sesame. You can purchase scores directly from FICO or one of the three major credit reporting agencies: Equifax, TransUnion, and Experian. Many credit card companies, financial institutions, and lenders also provide an updated credit score. Check your online account or statement.

The Bank of Elk River offers a variety of personal banking services and consumer resources for your financial well-being, including more information about credit scores and ways to build positive credit. Contact us to learn more.