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How Your Credit Score is Determined

Plus Three Ways You Can Improve It

Your credit score is a popular topic. You’ve seen it referenced in ads for everything from a new car to a new couch. You’ve seen apps, tools, and calculators for it online. You’ve probably gotten a scam phone call or two about it. But do you really know what it is?

Here’s the gist: credit scores are used to indicate how likely a person is to pay back a loan. The main consumer credit scoring models, FICO® and VantageScore®, rank consumer scores between 300 and 850. A lower number means more potential risk of default, and a higher number means less risk.

So how is your credit score calculated? FICO® Scores use information from your credit history—reported by banks, credit card issuers, landlords, and other service providers—to calculate your score. This data is grouped into five categories and give different weight toward your final score. Those categories are Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), and Credit Mix (10%).

It’s important to know that your FICO® Score is calculated only from the information in your credit report. However, when you apply for a loan, loan officers may look at more than you’re your score to help make a lending decision. At Sierra, we may look at an applicant’s income, how long they’ve worked at their current job, how long they’ve lived at their current address, and the type and amount of credit they are requesting.

Many members ask us “how can we improve our credit score?” There are plenty of fast credit “fixes” out there, but really improving your credit score takes a little work, and a little time. Here are three things you can start doing right now that will help you earn a better score.

  1. Pay Your Bills on Time. This may seem like a no-brainer, but it’s one of the most important steps to improving your score. Yes, that means your credit card, auto loan, and student loan bills. But it’s also important to pay rent, utility, and phone bills on time. Many of those companies also report to credit bureaus, and late payments can you’re your score. It’s a good idea to use tools like automatic payments or calendar reminders to help you pay on time every month. Behind on some payments already? Bring them current as soon as possible. Although late or missed payments appear as negative information on your credit report for as long as seven years, their impact on your credit score declines over time: Older late payments have less effect than more recent ones.
  2. Find and Fight Errors on Your Credit Reports. Sometimes a credit report has inaccurate information that’s hurting your score. All three credit bureaus are required to give you one free report each year. You should check all three (TransUnion, Equifax, and Experian) for errors, since they don’t always have the same info. Verify that the accounts listed on your reports are correct. If you see errors, dispute the information and get it corrected right away. Monitoring your credit regularly can help you find the errors before they do damage.
  3. Keep your credit inquiries down. Opening a new credit card can increase your overall credit limit, but the act of applying for credit creates a hard inquiry on your credit report. Too many hard inquiries can negatively impact your credit score, though this effect will fade over time. Hard inquiries remain on your credit report for two years. If you’re trying to raise your score for a major loan like a mortgage, keep your other credit applications down.

A low credit score won’t just potentially keep you from getting a loan, it determines the rate you pay when you do get a loan. The lower the credit score the higher your rate, which means a higher payment and more interest paid over time. A low credit score can also increase your insurance premiums and potentially keep you from renting a home.

Want to learn more about your credit score and get tips from an expert on how to improve your credit score, and ultimately your finances?

Sierra Pacific FCU wants to help. Reach out and schedule a time to meet with us. There’s no judgement here. We’ll work with you to make a money plan and help make smart financial choices. Call or stop by to get started.