What makes up your credit score?

What makes up your credit score?

October 15, 2020

Tagged As: Personal

Everyone will tell you it’s a good idea to improve your credit score. But in order to do that, it helps to know what exactly goes into it in the first place! First off, let’s start with a basic overview of what a credit score is, and the credit report your score is often bundled with.

What is a credit score and credit report?

Your credit score, also called a FICO score, is a number between 300 and 850. The higher the number, the better: a score of 740 to 799 is considered very good, though the average is closer to 700. FICO is an acronym for Fair Isaac & Co., the company that is responsible for tabulating your credit score.

Each of the three main credit agencies – Experian, Equifax, and TransUnion – have a score for you based on your credit report at that individual agency. The agencies tend to have different information on the people they track, which means your credit report and score will vary from agency to agency. Under federal law, you can request one free credit report per year from each of these three agencies at once by visiting the official annual credit report website.

Knowing what’s in your credit report(s) is important, because the scores that result from it are what potential creditors, landlords, and insurers look at for an instant judgement on your creditworthiness.

Lenders believe that people who are creditworthy will pay back what they owe. That’s why better credit reports and higher credit scores make it easier – and cheaper – to borrow. It also makes it easier to rent an apartment or buy a house, buy insurance, and achieve a number of other important life milestones.

Sources of data in your credit report

Credit scores are the result of a compilation of several different sources of data that are available in your credit report. That data falls into five distinct categories, which are listed in order of how much weight they usually have in informing your score:

  1. Payment history: Whether you’ve made past payments on time
  2. Amounts owed: If you use too much of your available credit, it could be bad for your score
  3. Length of credit history: A longer credit history is better for your score
  4. Types of credit used: Your mix of credit cards, loans, mortgages, etc.
  5. New credit: Applying for a lot of new credit at once can be detrimental to your score

You’ve heard before that paying credit card bills on time is crucial – and the list above is why. Your payment history – if you pay on time, if you pay in full or only the minimum balance, and if you have late or missed payments – is the single most important factor in determining your credit score.

One important thing to know about credit scores is that the information is limited to how you use credit – there is no information about your race, religion, medical history, or lifestyle. There’s not even any data on your checking and savings accounts or your investment accounts. It’s all about how you use credit.

Avoiding a bad score

There are two ways to have a bad credit score. The first, not surprisingly, is by not using credit wisely. That means spending more than you can afford, not paying your bills on time, and having too much outstanding credit, often spread across multiple credit card accounts. The second is not as intuitive but is still a factor: you can have a bad credit score if you don’t use credit at all. You have to actually use credit to have a good credit score. So simply cutting up your credit cards, or never having a credit card account, isn’t the path to a high credit score.

Building your credit score

If you’re looking to boost your credit score (or start building one), you might consider a credit card with Hills Bank. Our standard VISA® Platinum Credit Card features low introductory rates and no annual fee, giving you a great opportunity to enjoy the convenience of buying on credit – while also building your own.

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