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Credit 101: Understanding Your Credit Score

Published September 25, 2015

By Jessica Galvan, FSR

Last month, I wrote a blog post addressing the basics of credit and how someone can start building good credit. As mentioned, it can be a very complex financial concept.

We continue our Meriwest Credit 101 series today by discussing a very important aspect of credit: your credit score! This number can affect your likelihood to get approved for a loan or a card so be sure to take the time to understand where it comes from and why it matters.

What's a credit score?

A credit score is literally a pie chart of objective grading for everyone that has credit. Back in the 1960s, there was no credit score and people were given loans subjectively. Subjective lending was banned in the 60s and a credit score was created to establish criteria.

Credit scores are sometimes known as FICO scores, which stands for Fair Isaac Corporation, one of the largest and best-known companies that provide software for calculating credit scores.

Lenders determine if you are eligible to receive a loan based on this score, which ranges from 300 to 850. The higher the better!

Some companies utilize custom scoring and add other criteria to your FICO score based on what's important to them, such as employment history or length of residence.

How is a credit score broken down?

  • 35% - payment history
  • 30% - amounts owed (capacity)
  • 15% - length of new credit
  • 10% - new credit
  • 10% - types of credit used
Payment history refers to your monthly payment history and includes any public records and collection items! This segment also takes into consideration how many accounts show no late payments. Make sure to pay your bills on time because late payments can report against you for 7 years!

The "amounts owed" section looks at the amounts of money you owe on all of your accounts. This is also known as capacity because it refers to what percentage of your available credit you have remaining. The higher percentage of available credit you have, the higher your score! In other words, you probably don't want to max out your credit every month.

Your length of credit history is broken down into 3 different categories: the age of your oldest account, the age of your newest account and the average age of all accounts.

New credit refers to the credit you've accumulated in the last 12-18 months. This section of your score also looks at how many credit inquiries you have, either from employers, dealers, lenders, or service companies. New credit also evaluates how long it has been since you opened a new account.

Lastly, types of credit used looks at your mix of:
  • Credit cards
  • Mortgage loans
  • Retail accounts
  • Installment loans
  • Finance company loans
What's a good credit score?

The minimum score is 350 and the maximum is 850.

The average credit score in the lender world is around 680, which used to be a great score. Nowadays, people should aim for 760 or higher, but definitely at least 700.

How long does it take to get a good credit score?

Establishing good credit is a slow and steady process. Make sure to be aware of your credit score by frequently checking your credit report!

Be on the look-out for the next post in our Credit 101 series, coming soon!

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