Credit Score: What is it?

A credit score is a three-digit number that determines an individual’s creditworthiness and is used to represent their credit risk. Banks and lenders use this number to decide whether they’ll approve you for a credit card or a loan and what interest rate you will receive. A credit score typically ranges from 300 and 850; a higher score indicates the individual has a more favorable credit history.

The general breakdown for credit score ranges are as follows:

There are several different credit score models, but the most commonly used is known as the FICO score. Because there are multiple ways to calculate your credit scores, it is common to have multiple scores at the same time. Equifax, Experian, and TransUnion are the three major credit reporting agencies in the United States. Lenders are not required to report to all three agencies, which causes a discrepancy in your scores. The three credit reporting agencies may also have differences in the information they collect; however, there are five main factors that go into calculating a credit score.

Credit Score Pie Chart Image

Payment history counts for 35% of a credit score and shows whether or not you pay your debts on time. Because credit scores were created to predict if you will make your payments on time, this component carries the greatest weight. A late or past due payment can impact your credit score significantly. To get the best scores, it is important that you make your payments on time.
Credit utilization counts for 30% of your credit score. It measures how much of your available credit you are using. Maxing out your credit cards would negatively impact your score. The best practice is to keep your credit card balance between 10% and 20% of your limits.
Length of credit history counts for 15% of your credit score. Longer credit histories are considered less risky because they have more data to determine payment history. The length of your credit history looks at both the age of your oldest and newest account as well as the average age of all your accounts. Closing a credit card could impact both your credit utilization ratio and your credit history.
Credit mix counts for 10% of your credit score. It shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards. It’s important to note that you shouldn’t apply for a new loan simply to improve your credit mix. Because your length of credit history counts for more than credit mix, it would have a negative impact on your score.
New credit also counts for 10%, and it factors in how many new accounts a person has, how many new accounts they have applied for recently (which result in credit inquiries), and when the most recent account was opened. Opening new credit accounts quickly and often can signal that you’re enduring financial difficulties. The fewer recent credit inquiries you have, the better it is for your scores.

As the information reported to the credit agencies changes, so will your credit score. You can monitor your score both with free and paid opportunities.

Under federal law you can obtain your credit report, not your credit score, for free each year. You can visit the website at annualcreditreport.com or call 877-322-8228 to request a copy of your credit reports by phone. You have the option to order all three reports at once or stagger them throughout the year. While the differences between the agencies may vary slightly, it will provide you a good resource for monitoring your score and your identity.

Some credit card issuers provide free credit scores for their customers. Ask your current credit card company if scores are available. While this will not provide you detailed information of what is impacting your score, you will be able to monitor changes in your score. There are also sites like Credit Sesame, Credit Karma, and Bankrate’s Quizzle® who partner with the major credit reporting agencies to provide you information about your credit score. FirstCNB is not affiliated with any of these sites, and the names are being provided merely for informational purposes.

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Future Blogs: How to Improve Your Credit Score | Why Your Credit Score Matters

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