Your credit score may seem like an ambiguous number, but it can have a BIG impact on your financial life since it provides financial institutions and other companies with a snapshot of how “creditworthy” you are. 

Your credit score is a three-digit number typically ranging from 300 to 850 calculated by the three main credit reporting bureaus: Equifax, Experian, and Transunion. The information gathered is put into a scoring module, the most common being FICO.

How is your credit score calculated?

The higher your score is, the less risky you are to lenders. Your credit score is based on five areas and makes up a different percentage of your credit score.

  • Payment history is the most important factor since it makes up 35% of your score! It also lets potential lenders know what your payment habits are. 
  • Credit utilization makes up 30% of your credit score. The bureaus look at the entire amount of debt you owe, the amount of money you borrowed compared to the credit available to you.
  • Credit history is the length of time you’ve had your accounts and the age of your credit history. This section makes up 15% of your credit score.
  • Credit mix is the number of accounts you have open and the variety of account types you have in your name. This is worth 10% of your score.
  • Credit inquiries are the number of recent credit inquiries or recently opened lines of credit and are worth 10% of your credit score.

What is a good credit score?

The range of good credit may vary depending on the credit scoring model. Usually, scores lower than 630 need some improvement, while any credit score of 670 or higher is considered a “Good” rating and scores above 740 are deemed “Excellent.”

How can you check your credit score?

Reviewing your credit report regularly is a great way to check for errors and determine areas for improvement. You can get a free copy of your annual credit report at annualcreditreport.com. Your financial institution may also provide free access to your credit score for free within their digital banking platforms too.

What can you do to improve your credit score?

  • Keep your accounts open: Even if your balance is paid off it looks good to keep an existing account open to prove your creditworthiness.
  • Stay up to date on your payments: Your payment history is the most important component bureaus use to calculate your score, so it’s important to at least pay your minimum balance on time. 
  • Follow the 30% rule: A good rule of thumb is to keep your balance under 30% of your total credit limit. Potential lenders may think that you are managing your finances poorly if you max out your credit card every month.

Understanding how credit scores and reports can seem like a lot of work, but with a bit more knowledge you’ll be able to achieve your financial goals like buying a home or car. 

Let AFFCU continue to help you with your next goal. Learn more about our mortgage loans or auto loans any time.