Understanding Your Credit Score

Your credit score is a three-digit number assigned to you based upon your credit history. It is used to determine your creditworthiness and plays a key role in determining your interest rate for many common loan-types.

Here you will learn several key facts about credit scores, including:

  • How to locate your credit score
  • What determines your credit score
  • What impacts your credit score
  • How to improve your credit score

What Determines Your Credit Score?

Most of the financial facets in your life are tied to your credit score, from your monthly cell phone bill to your rent or your car payment, to medical bills. Most companies that extend credit or pay-by-month services report your payment habits to one or more of the three major credit bureaus: Equi-fax, Experian, and TransUnion.

Factors that impact your credit score include how much credit you have available to you, what your mix or ratio of credit is, the length of time you have had these credit lines, how much credit is cur-rently in use compared to how much is available to you, and of course, your payment history.

Here is a general breakdown of how your credit score is determined:

  • 35% = based on payment history (i.e. on-time pays or delinquencies)
    • more weight on current pay history
  • 30% = evolving credit/proportion of balance to high credit limit
    • installment raises the score
    • revolving lowers the score
    • the more number of finance company loans, the lower the score
  • 15% = length of credit
  • 10% = mix of credit
  • 10% = new credit

What Impacts Your Credit Score?

It is important to understand what impacts your credit score.

Let’s take a look at actions that create a negative impact on your credit score:

  • Missing payments (regardless of the dollar-amount missed; it will take 24 months to restore credit due to one late payment)
  • Credit cards at capacity (i.e., maxing out credit cards)
  • Closing credit cards out (this negatively lowers available capacity)
  • Shopping for credit excessively (applying for too many loans or credit cards in a short period of time)
  • Opening up numerous trades in a short time period
  • Having more revolving loans in relation to installment loans
  • Borrowing from finance companies

Equally important is understanding what does NOT impact your FICO credit score with the three ma-jor credit bureaus:

  • Debt ratio
  • Income
  • Length of time at your current residence
  • Length of employment

How Far Back Do Credit Bureaus Report?

Credit bureaus record the last seven years of financial activity. Much of your credit score is weighed based on the last three years of activity, with the past 12 months’ actions making up 40% of your score. Here is a breakdown of how the credit bureaus typically weigh your loan and payment actions:

Approximate Credit Weight for Each Year

  • 40% = Current to 12 months
  • 30% = 13-24 months
  • 20% = 25-36 months
  • 10% = 37+ months

How Do I Improve My Score?

First, it bears mentioning that there is no quick fix when it comes to repairing your credit score. Time, diligence, and continually demonstrating strong payment habits will catch up with you and raise your credit score incrementally over time. Some actions that may raise your score include:

  • Pay down credit cards
  • Keep credit cards open
  • Continue to make payments on time (older late pays will become less significant with time)
  • Slow down on opening new accounts or applying for new lines of credit