A credit score provides access to financing for major life purchases such as a car, a home, and even tuition. Credit scores also unlock household utility services, including mobile phone and internet services.
But how is credit scored? Since higher scores can result in lower fees, it’s vital to understand what makes up a credit score. Here are the five components that make up a credit score, in order importance:
Payment History – 35%: Paying back debts on time has a positive impact while late payments, judgments, and charge-offs have a negative impact. Key factors include how late a payment was, how much was owed, how recently the late payment occurred, and how many late payments a person has.
Amounts Owed – 30%: This factor marks the ratio between used versus available credit. Credit card users should make an effort to keep balances as close to zero as possible. Paying off balances each month rather than only making minimum payments also has a positive impact.
Credit History – 15%: This marks when a credit line was established. A long credit history is stronger than new or little to no credit history. If you have older credit cards with no balance (and no annual fee), keep them open. This will preserve the longevity of your credit history.
Mix of Credit – 10%: This includes credit cards, retail accounts, auto loans, and mortgage loans you have. Credit mix isn’t typically a key factor in determining a credit score unless there is not a lot of information on your credit report to use as a basis for your score.
New Credit Inquiries – 10%: This quantifies the number of inquiries or requests for new credit within a 12-month period. While some individual inquiries can impact your credit score, multiple inquiries from mortgage lenders within a short period of time are usually treated as a single inquiry with little impact on a credit score.
Have more questions? Contact one of our UCCU Mortgage Loan Officers and they can help you get answers!