5 Ingredients That Make up Your Credit Score
What really goes into that very important three-digit number
Credit scores influence the credit or the amount that is available, and the terms (e.g., the interest rate) that lenders may offer. They are vital part of credit health.
When a consumer applies for credit – whether for a credit card, mortgage, or an auto loan – lenders want to know what risk they would take by loaning money. A credit score helps lenders evaluate a credit report because it is a number that summarizes credit risk based on a snapshot of a credit report at a particular point in time.
The collected information in your report is the source of your credit score, a three-digit number that lenders use to decide whether or not to offer you credit and at what price. The higher your credit score, the better your chances are of getting a loan with an attractive interest rate. So when it comes to getting a good loan, it is important that your credit report – the basis for your credit score – is accurate, complete and in the best shape possible.
Think of credit scoring as a point system based on your credit history, designed to help predict how likely you are to repay a loan or make payments on time. Your score is calculated from many different pieces of data on your credit reports, but there are five main categories of information they consider:
- Payment history (35%)
- Amount of debt (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%)
Keep in mind that the importance of any one ingredient depends on the information on your entire credit report. Credit mix, for instance, only makes up 10 percent of your score, but it will be a more important factor if there is not a lot of other information on your report.
1. PAYMENT HISTORY
Have you paid your bills on time? Late payments, bankruptcies and other negative items can hurt your score. A solid record of on-time payments helps your score.
2. AMOUNT OF DEBT
Your credit score will look at the amount you owe on all of your accounts, the number of accounts with balances and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.
3. LENGTH OF CREDIT HISTORY
A longer credit history will increase your score. However, you can get a high credit score with a short credit history if the rest of your credit report shows responsible credit management.
4. NEW CREDIT
Credit scores take into account several factors when considering your amount of new credit, including how many new accounts you have recently opened and whether you have been rate shopping for a single loan or applying for multiple new credit lines. Opening several new credit accounts in a short period indicates greater credit risk.
5. CREDIT MIX
Several minor factors can influence your score. For example, having a mix of credit types on your credit report – credit cards, mortgage, or personal loans and lines of credit – is normal for people with longer credit histories and can slightly add to their scores.
Melissa Schutz is a marketing professional specializing in digital and graphic arts at WESTconsin Credit Union, a community partner of Chippewa Valley Family. After work you will find her supporting her son’s local youth sports programs or helping her husband with their herd of Angus and Hereford cattle. And if she’s lucky, she’ll squeeze in a horseback ride, too!