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5 Factors of a Credit Score

5 Factors of a Credit Score

Podcast Transcription:

Money Talk is a podcast brought to you by PFCU where we will share tips and tricks and talk to the experts on all things finance related. Join us as we cover everything from credit and loans to cyber security and careers. No matter where you are in life, PFCU is here for you.

Hey everyone, I’m your host Maddy and in this episode of Money Talk I am going to take a deeper dive into the exciting topic of credit score. In the last episode of Money Talk, I talked about what a credit score is and in this episode I’m going to talk about the factors that make up your score. So there are five different factors that create your score and they all hold a different weight.

The first factor of your score is payment history. This is the biggest chunk of your score, making up 35 percent. Lenders want to know whether you’ve paid past credit accounts on time. This helps the lender figure out the amount of risk it will take when extending credit to you. This is one of the most important factors in a credit score so if you do nothing else make sure you’re paying your accounts on time and not missing any payments, even if that just means making a minimum payment on an account. You don’t want to miss those payments, it can really hurt your score.

The next factor is amounts owed which is 30 percent of your overall score, so this is another big chunk of your credit score. Having credit accounts and owing money on them doesn’t mean you are a high risk borrower, however, if you’re using a lot of your available credit, this may indicate that you are relying on credit and at a higher risk for defaulting. For example, having all of your credit cards maxed out or close to their limit. A good rule of thumb is to have your credit utilization at 30 percent or less which means you’re using 30 percent or less of the total available credit to you. So to make this a little bit simpler let’s say that you have a credit card with a $1,000 limit that would mean that you would want to keep your balance at $300 or below because you are utilizing 30 percent or less of that credit card.

The next factor is length of credit history, making up 15 percent of your score. In general, a longer credit history will increase your score, however, even people who haven’t been using credit long may have a high score, it just depends on how the rest of their credit report looks. Your credit score takes into account how long your credit accounts have been established including the age of your oldest account and your newest account and the average age of all of your accounts. If you have a really old credit card that you’re considering closing, you might want to reconsider. Keeping your oldest account open lengthens your credit history and it helps your score. Considering using that card for something recurring that you don’t have to think about to keep it active. For example, my husband and I, we have a couple credit cards and one of them we use for all of the recurring payments every month that we don’t think about, things like Netflix and other subscriptions that we have. We just keep those payments recurring on those credit cards, we don’t think about it and every month we go in and we pay it off in full. And then your credit score also takes into account how long it has been since you’ve used certain accounts. Again, you want to use your credit cards at least every few months to keep them active so that old credit card, put those recurring payments on it, pay it off every month and you can keep those accounts active.

Next we have the two smallest portions of your credit score. The first is credit mix, this determines 10 percent of your overall score. Your credit score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Now you don’t need to have one of each and it’s important to know that you don’t want to go open a bunch of different credit accounts for the sake of this factor. You still want to take your time, do your research and determine your need for that particular credit account. This is a small portion of your credit score so I don’t want you to panic too much if you only have one or two different credit accounts. These are things that you build up over time and that you get over time.

The last factor is new credit, this also makes up 10 percent of your score. Opening several credit accounts in a short period of time represents a greater risk, especially for people who don’t have a long credit history. If you can avoid it, try not to open too many accounts too rapidly. As I said before, take your time, do your research and look at options. But you don’t want too many serious credit inquiries, this is what we call hard inquiries and that’s where the next step of pulling your credit happens because you applied for a new line of credit like a loan or a credit card. You’re allowed to rate shop and look around and find the best option for you but just be careful on how many serious or hard credit inquiries you have where that loan officer or that dealership is actually pulling your credit because you applied. Keep this in mind with the choices that you make with credit and the steps that you’re taking to build your credit, especially that payment history and amounts owed are the two biggest chunks of your credit score. If anything just pay those accounts on time. It can be one of the most important things you can do to raise your credit score or to keep your credit score up.

Thank you so much for listening to this episode of Money Talk.

Money Talk is a podcast brought to you by PFCU. PFCU offers many products and services to fit your needs, from our various loan and account options to our team of financial coaches to help you reach your goals. Make sure to take advantage of the many conveniences PFCU offers such as the mobile app, mobile wallets, bill pay and more. Visit our website at pfcu the number four me dot com to learn more. PFCU is an equal housing lender and is federally insured by the NCUA.