In this third and final post from our “credit scores” blog series, I’ll pull back the curtain to give you a behind-the-scenes look at what’s really in a credit score.
So what makes up your credit score?
According to the FICO® credit scoring models, information from five categories is compiled to construct your overall score. Each of the categories is weighted differently, and the importance of each category varies from person to person. I’ll explain …
Payment History (35%) Simply put, lenders want to know if you make on-time payments. If you are late on one, there’s a bigger chance you’ll be late on another. Credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are all considered. Public records and collection items, which include things like bankruptcies, lawsuits and wage attachments, are a bigger deal than, say, one late credit card payment. It also depends on how late the payment is, how much is owed, how many accounts there are and how recently it occurred. Negative information can remain on your credit report for seven years, and in certain bankruptcy situations, 10 years. The impact will lessen over time, but closing the accounts will not make it go away.
Amounts Owed (30%) Lenders want to be sure you aren’t overextending yourself, so they are particularly interested in how much you owe. How much is too much depends on your specific credit profile. Several factors are considered, including the total amount you owe across all your accounts, the amount you owe on different types of accounts, the amount you owe versus the amount of credit available on revolving credit accounts (also referred to as utilization), the number of accounts with balances, and how much you still owe on an installment loan compared to the original loan amount.
Length of Credit History (15%) This category is pretty straightforward. The longer you have had credit, the more favorable your credit score should be — given everything else is in order, of course. If you’re newer to credit, take heart: You can still have a good credit score if you take care of business in the other four categories.
Mix of Credit (10%) In your wallet or filing cabinet, you likely have evidence of several types of credit — think credit cards, retail accounts, installment loans, mortgage loans and finance company accounts. If you want to raise your credit score, pay close attention to the way you manage your credit cards. FICO® states that people without credit cards tend to be viewed as a higher risk than those who do have credit cards and use them responsibly. So how do you responsibly use a credit card? 1) Always make payments on time. 2) If possible, pay off your balance in full every billing cycle. 3) Don’t charge more than you can afford to repay.
New Credit (10%) When you open too many new accounts in a short period of time, lenders take that to mean you’re a higher risk. This category considers how many new credit accounts you have. That information is classified by the type of account, how many inquiries you have, the length of time since those inquiries were made, how long it’s been since the last time you opened new credit and whether or not you have good recent credit history.
Pro tip: Checking your own credit does not count as an inquiry for credit scoring purposes,
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and you should do so on a regular basis. Learn more about inquiries here.
It’s also important to note what’s not included in your FICO® credit score: age, income, employment information, location, interest rates, child/family support obligations, race, color, religion, national origin, sex, marital status, “soft” inquiries, any information not found in your credit report, any information not proven to be predictive of future credit performance, and whether or not you are participating in credit counseling of any kind. This last point is especially important, as I’ve had members share with me they did not seek credit counseling because they were afraid it would hurt their credit score.
Thanks for joining me for this three-part series on the truth about credit scores. For additional questions or points of clarification, please comment below!
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This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
VantageScoreSee note® 3.0, with scores ranging from 300 to 850, is a user-friendly credit score model developed by the three major nationwide credit reporting agencies, ExperianSee note®, TransUnionSee note®, and EquifaxSee note®. VantageScore 3.0 is used by some but not all lenders. Higher scores represent a greater likelihood that you'll pay back your debts so you are viewed as being a lower credit risk to lenders. A lower score indicates to lenders that you may be a higher credit risk.
There are different credit scoring models which may be used by lenders. USAA does not currently use VantageScore 3.0 for loan underwriting, so don't be surprised if your credit application is evaluated using a score that's different from your VantageScore. For some consumers, the risk assessment of VantageScore 3.0 could vary, sometimes substantially, from a lender's score. If the lender's score is lower than your VantageScore 3.0, it is possible that this difference can lead to higher interest rates and sometimes credit denial.
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