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Your credit score is a very crucial component of your financial health. This number provides lenders the ability to evaluate your risk level when determining an appropriate and feasible loan amount, as well as an interest rate. Even with that said, most people still do not fully understand their credit score, how to improve it, where it falls on the scale of “bad” to “excellent” or how your financial spending and habits both positively and negatively affect this particular rating. It isn’t as intimidating as it seems – let us explain!  Check out this great video from one of our counterparts in the credit union industry, 3 Rivers.  It does a great job of explaining credit scores.

What Is a Credit Score (a.k.a. FICO)?

A summary of credit report info represented as a three digit number, based on mathematical calculations which provides creditors with a fair, accurate and quick way to evaluate RISK

Range of Scores

730-850 = A+
680-729 = A
640-679 = B
600-639 = C
550-599 = D
549-300 = E

What Makes Up Your Credit Score?

  • 35% Payment History (do you pay on time)
  • 30% Capacity (debt owed vs. available credit)
  • 15% Length of Credit (length of new credit and total history)
  • 10% New Credit (new credit and # of recent inquiries)
  • 10% Credit Mix (percent of revolving vs. installment)

Recognize Actions That Hurt Your Score

  • Missing payments – pay on time!
  • Credit cards at maximum limit. Keep balances below 75% of available credit.
  • Shopping for credit excessively
  • Opening up numerous accounts in a short period of time
  • Borrowing from finance companies (sub-prime lenders/store cards)
  • Closing credit cards

Take Steps to Boost Your Score

  • Pay down credit cards
  • Keep credit card balances as low as possible and limits as high as possible
  • Limit new account opening
  • Continue to make payments on time to build a solid credit history
  • Do not close all of your credit cards because capacity may decrease
  • Move revolving debt to “installment debt”

Recent Payment History Has More Influence

  • 40% weight = current to past 12 months
  • 30% weight = 13-24 months
  • 20% weight = 25-36 months
  • 10% weight = 37+ months

Negative credit will stay on your credit report for 7 or 10 years, but the negative impact fades quickly out of the score.

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