The Factors That Make up Your Credit Score (And How to Improve Your Score)
August 24, 2018
By Laura Pratt
Morningside Branch Manager
Your credit history and credit score are important — especially if you plan to buy a house, a new car or another big purchase that requires some type of loan.
But according to a recent survey by the American Bankers Association, one in three consumers doesn’t know their current credit score. That's a big, big problem! Why? Because not paying attention to your credit now, could lead to bigger issues down the road.
What is a Credit Score?
A credit score is a rating of your credit history, usually on a scale of 300 to 850, that lenders use to decide whether or not they will lend you money (and at what rate). Those with higher credit scores are considered lower risk, and therefore more likely to get better loan terms and interest rates than people with low scores.
What’s the difference between a Credit Score and Credit Report?
A credit report is a detailed collection of your financial history (for instance, if you’ve paid your bills on time, how long you've had credit, or how much of your available credit do you use). A credit score, meanwhile, takes all of the information from your credit report and turns it into one simple, real-time "score" to let banks know how you're doing.
Think of your credit score as your current “Financial GPA,” and your credit report as summary of all your grades from every report card over the past seven years!
IS A FICO® SCORE THE SAME THING?
The FICO® Score is a specific type of credit score. In fact, it's the most widely used credit score in the financial industry. (FICO stands for the Fair Isaac Cooperation, a company that uses a worldwide network of partners to help banks tell how likely a customer is to pay their credit obligations.)
Here’s Why You Need a Good Credit Score:
If your credit score is low, you have less of a chance of getting approved for a car, home or other type of loan. On the other hand, people with higher credit scores are considered lower risk — and therefore more likely to get better loan terms and interest rates than people with low scores.
What is Considered a Good Credit Score Rating?
On a scale of 300 to 850, a good credit score is generally considered to be above 720. However, opinions will vary depending on the bank offering the loan. According to the ABA, the national average FICO® score is 699.
What Credit Score Do You Need to Buy a House?
The answer varies by bank, but most lenders require a credit score of 620 or above to consider you a good candidate for a mortgage loan. If you have a lower credit score, talk to your bank about what specific changes you need to make, to increase your chances of getting a home loan.
Factors That Affect Your Credit Score
Generally, about 35 percent of your score is based on your payment history; 30 percent is based on the amount you currently owe (your debt-to-credit ratio), 15 percent is based on how long you have had credit; 10 percent is based on the number of inquiries into your credit report; and 10 percent is based on the types of credit you have.
In addition to these factors, some lenders might also have their own scoring methods, like total annual income or the amount of time you have stayed at the same job.
Common Credit Score Terms
Payment History: A record of your on-time and late payments from past loans and credit cards. Late payments lower your score, so make sure to pay your bills on time.
Debt-to-Credit Ratio: Your credit limit minus the amount you owe on each account. Keep the amount you owe under 30% of your limits, or it could hurt your score (even if you make the payments in full).
Length of History: The amount of time since you opened each credit account you have. A short history isn’t a bad thing, if you show responsible credit management. But having zero credit history can hurt your chances to get a loan.
Number of Inquiries: The amount of times institutions inquire about your credit score, which usually happens when you first apply for a loan or credit card. Having too many credit account inquiries can lower your score. However, if you’re applying to a number of different banks for the same home loan or car loan, all of their account inquiries will only count as one — as long as they all happen with a 30-day period.
Type of Credit: Mortgages, auto loans, student loans and credit cards — these are all different types of credit. Having a variety of credit types could boost your credit score.
Steps to Improve Your Credit Score
There is no overnight fix for a low credit score, but there are steps you can take to improve it over time:
1. Check your credit report for free.
According to federal law, each year you are entitled to receive one free copy of your credit report from each of the three credit reporting agencies. Request your free report using the Federal Trade Commission’s website at www.annualcreditreport.com. Check your credit report annually to ensure no new cards or accounts have been opened by criminals in your name, and make sure everything else looks accurate so you can get the best terms when you apply for a loan.
2. Pay your bills on time.
Payment history makes up the largest portion of your credit score (32-35 percent), so the more you pay your bills on time, the better your score. One way to avoid missed payments is to set up "automatic bill pay." At Security National Bank, you can set up auto bill pay through online banking or by using the SNB Mobile App.
3. Never max out your card.
Just because you have a huge “credit limit” on your account, doesn’t mean you should use it — or ever get close. Racking up big balances can hurt your credit score, even if you pay your bills in full, so try not to use more than about 30 percent of your available credit on any credit card.
4. Think Twice Before Closing an Old Credit Card (or Starting a New One).
Closing your oldest credit card could significantly shorten your credit history, and in turn damage your credit score (since 15% of your score is determined by the age of your accounts). On the other hand, keeping an old account open can also have a negative impact — especially if you never use it. Having too many inactive credit cards lying around doesn't help your score — in fact, it puts you at additional (and unnecessary) risk for fraud.
If you’re unsure of whether or not to close an old account, or start a new one, contact a personal banker who can provide you with professional advice.
5. Read the “fine print.”
A loan or credit card application is a contract — so read it thoroughly before you sign on the dotted line. Watch out for “introductory rates” that seem too good to be true (they’ll usually expire and leave you high and dry). Also pay attention to the length of monthly billing cycles, so you never get caught off-guard with a late or missed payment.
6. Set a budget and stick to it.
Never spend more than you can repay, and develop a financial plan to keep your finances in order. At Security National Bank, we have a helpful budget spreadsheet to track your monthly finances.
7. If you’re in trouble, talk to a credit counselor (NOT a credit repair scam)
If you are only paying the minimum balance on your cards, making late payments, or using cash advances to pay for daily living expenses, you might be in the credit “danger zone.” Contact the National Foundation for Credit Counseling for help. And be wary of anyone who is not listed by the Justice Department as a reputable credit counselor, especially people who claim they can "fix" your credit report quickly, easily and cheaply. No one can legally remove negative, accurate information from your credit history.
8. Shop around for the best rates.
Remember, you are the customer! Don’t jump at the first appealing offer for a loan; compare rates and fees from two or three different financial institutions to help make sure you get the best deal.
More questions about your credit score?
We’re here to help. Contact us at Security National Bank, or set up an appointment with a personal banker today!