FCCB Blog

Credit scores help companies like lenders and credit card issuers predict the risk of lending you money. Lenders use credit scores, found on Credit Reports, to answer an important question: “If I lend this person money, what is the likelihood they will pay it back as promised?”

Credit scores go in a rank order on a scale of 300-850.  That higher score tells lenders you’re less likely to fall seriously behind on credit obligations.  If your score is low, the lender knows that the risk of you paying late is greater. The Credit Report also includes any late payments of 30 days or longer and any bills that may have been charged off (not paid).

What Makes up Your Credit Score

Bank account balances do not appear on your credit report. Neither does your income or you net worth. These factors don’t apply to your credit score.  Factors that do impact your Credit Score fall into one of the following 5 categories

1. Payment History 35%

Your bill payment history has the most weight when it comes to your credit score. On-time payment history won’t earn you a perfect score, but it’s a great place to start. Lenders look to determine if there are any late payments on the credit report.

If the answer is yes…

• How late were the payments 30, 60, 90 days etc.?
• How long ago did the late payment take place?
• How many late payments appear on the report?

A single 30-day late payment may not destroy your credit score if the rest of the report is in good shape. However, you should expect some damage. If you have multiple late payments or more severe late payments, your score will take a harder hit.

Other payment-related history that could damage your score in this category would be bankruptcies, collection accounts, charge offs, repossessions and foreclosures.

2. Amounts Owed 30%

If you have credit cards, keeping a low balance-to-limit ratio (credit utilization ratio) will help you earn, and keep a better credit score. Credit utilization is largely responsible for 30% of your score.

What lenders look for in the Amount Owed category

• What’s the total amount of debt on the credit report?
• How does the debt break down among the types of accounts (credit cards, mortgages, auto loans, student loans, etc.)?
• What is the total number of accounts and their balances?

You want to pay down your credit card balances and try to maintain a balances ratio of 30% or less on your credit cards. Your large installment loan balances like mortgages, auto loans and students loans won’t have much impact on your credit score as long as you make payments on time.

3. Length of Credit History 15%

The third most influential category of information when it comes to your credit score is length of credit history.

What lenders look for in the length of credit history category include…

• What are the ages of the newest and oldest accounts on the credit report?
• What’s the average age of all the accounts combined?
• How long has each individual account been open?
• When was each account last active?

4. New Credit 10%

Each time your credit report is checked, also known as a credit inquiry, it has the potential to negatively impact your credit score.  A large number of inquiries is seen as a signal that someone is trying to obtain a lot of credit.

When you apply for new credit and a lender pulls your credit this is known as a hard inquiry. Hard inquiries appear on your credit report for 24 months. Some hard inquiries may impact your score for up to 12 months.

Soft inquiries may show on your credit score as well. A soft inquiry usually happens when you check your own credit or when a lender does a follow-up for a preapproval or a loan renewal. Soft inquiries never impact your credit score.

What lenders look for in the new credit category

• How many new accounts appear on the credit report?
• What are the open dates of those new accounts (if any are present)?

Best practice is to only apply or open new credit when you need it.

5.Credit Mix 10%

This is the final factor that makes up your credit score. Having diversity in the type of accounts that show up on your credit report is helpful. Having experience managing multiple/variety of accounts can be an asset to your credit score.

What lenders look for in the credit mix category include…

• Credit Cards
• Installment Loans
• Retail Accounts
• Mortgage Loans
• Finance Company Accounts

If your credit report has no revolving accounts, you may want to open a new credit card and manage it well. This would impact your credit score and benefit you in the long run.

A Shared Secured loan is a great way to start to build your credit if you have no score. A Shared secured loan is holding available funds you have as collateral until the loan is paid off.  

A Credit Rebuilder loan could help build your credit if you have no score but wouldn’t be the best way to build your credit because of the cost (fees and interest). A Credit rebuilder loan has a unique ability to help you build a small savings fund while establishing a positive tradeline on your credit report as long as the lender reports to the credit bureaus.

Lastly, consider spreading out new credit applications rather than opening several accounts at once. You should avoid taking on new debt for the sole purpose of improving your credit mix.