Understanding Credit: Part Two

This is part two of a three part series on credit by our Credit Manager, Cathy Latiolais. Cathy has over 17 years of experience with lending and has helped thousands of members over the years. Missed part one? Find it here.

Understanding your Credit Score

phone displaying Savvy MoneyThe credit score used by most lenders is the FICO score.  The fico sore is a number that can range from a low 300 to an 850 depending on the model used by the reporting organizations.  This score reflects the individual’s ability to pay for services or repay loans.  There is a lot of miscommunication about what is included in your score.  Below is a list of information that is not included in the credit score.

  1. An interest rate being charged on a credit card or other accounts.
  2. Child or family support payments
  3. Rental Agreements

Credit scores are calculated using these 5 key factors.

  1. Payment history is 35% of the credit score. The payment history reflects if the member pays on time.  Late payments will bring down the score significantly.  This element of the score is weighted to give recent activity more consideration.  These are approximately the credit weights broken down for each year.

40% is based on current – 12 months

30% Is based on 13-24 months

20% is based on 25-36 months

10% is based on 37+ months.

  1. Capacity or better known as credit utilization is 30% of the credit score. Capacity refers to the amount of the available credit on existing revolving accounts. The key to good credit utilization is to the keep the balance at less than 30% of the credit limit.  Balances below 20% will improve your credit score further.
  2. Age of accounts is 15% of the credit score. The longer you have the account the better.  Closing an older account can lower an individual’s credit score by almost 150 points. It will reduce the average age of all open accounts and will impact your credit utilizations because there is now less credit available.
  3. Debt accumulated in the last 12-18 months is 10% of the score. This includes all new debt taken out within the last 18 months and takes into consideration balance transfers.
  4. The mix of credit is 10% of the credit score. Different types of credit are given different values in each scoring model.  For example, Mortgage debt has more weight than installment credit such as an auto loan which results in a higher value.  Whereas revolving credit like credit cards are scored at a lesser value.

In Part Three, we discuss actions that hurt your score and practical tips for improving your score.


Post author: Cathy Latiolais, Credit Manager

The opinions expressed on this page are for informational purposes only and is not intended to provide legal or financial advice. The views expressed are those of the author of the article and may not reflect the views of the credit union.