Understanding how your credit score is calculated

Understanding Your Credit Score

What is a Credit Score?

A credit score evaluates how likely you are to pay back your debts on time. Your credit score is incredibly important, yet few consumers know how it works, or what it’s used for. Your credit score will affect your ability to secure credit and determine the interest rates that you will pay on money you borrow, including car loans, credit cards, and mortgage loans, for example. A higher credit score will help you secure lower rates on loans, and a lower credit score typically results in higher costs of borrowing, meaning you pay more interest over the life of your loan.

How Do I Check My Credit Score?

If you’re unsure of your credit score, don’t worry, it’s very easy to check. If you would like to get a free copy of your actual credit report, you can do so once per year by going to www.annualcreditreport.com. You can also sign up for a Credit Monitoring service that will provide credit reports as part of your subscription.

What Affects My Credit Score?

The calculation of your credit score is complex because there are quite a few factors that go into how your credit score is calculated:

Types of Credit (5%)

Think of this as the diversity of your lines of credit. Having a few different lines of credit will help support a higher credit score. For example, if you have a mortgage, student loan, and a credit card, your mix is more diversified than if you have 3 credit cards.

Length of Credit History (18%)

This is the amount of time you’ve been using credit to borrow money. The longer you’ve had your credit accounts open, the less risky you’re perceived to be by prospective lenders.

Credit Utilization (32%)

This is the ratio of the amount of money you owe compared to the overall credit lines extended to you. The lower your percentage (the amount of money you owe divided by total credit limits), the less risky you seem to lenders. By paying your balances each month, you keep your utilization score lower.

Payment History (38%)

Payment history carries the heaviest weight in your credit score. Consumers who have a history of paying their bills on time will typically have a higher credit score than consumers who are late on their payments.

New Credit Applications (7%)

This factor considers the number of inquiries you have on your credit history. Generally speaking, consumers who are applying for various loans (mortgage, credit cards, financing offers) in a short amount of time are viewed as higher risks by lenders. To keep these in check, limit the number of applications you submit for new lines of credit.

How Can I Increase My Credit Score?

In the long term, increasing your credit score really comes down to having some diversification in your credit report and paying your bills on time.  Having several lines of credit that you continuously pay on time and in full should help you increase your credit score over time.

More Credit Score Information

Understanding how your credit score works is the first step to improving or building your credit history, so you can pay less interest for the money you borrow. This is especially true if you’re preparing for a big purchase, like a home. For a more detailed look at how credit scores work, check out this guide to credit scores from our partners at Everfi.

KEMBA Credit Score Resources

Do you have questions about your credit score or are you looking for ways to improve your score? KEMBA Financial Credit Union can help. KEMBA offers financial counseling resources for members to help take control and improve their personal finances, in addition to competitive rates and unique solutions. If you have questions, our dedicated local associates are here to help. Call 614.235.2395 and select Option 4 for more information.

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