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Whether you already have established your credit, or you are just beginning, its good to know why you need it. You’re credit score has a major impact on your life. Whether its signing up for a credit card, buying a house, or even getting a job, your credit score can play a role in the result of getting approved as well as the rate that you receive.

Your credit score lets lenders know if you are reliable and responsible with the money you want them to give you. We will help you figure out what a credit score is, how its calculated, and some tips on getting started or repairing it.

First thing that you need to know is that there isn’t just one score. There are 3 credit reporting agencies (CRA) that will track your credit score. What is a CRA? explains it as this, “A credit reporting agency is a company that collects information about where you live and work, how you pay your bills, whether or not you’ve been arrested, sued, or filed for bankruptcy. All of this is combined in a credit report.”

The 3 credit reporting agencies are

[blockquote author=”” link=”” link_title=”” target=””]According to Law you are able to request a free copy of your credit report every 12 from each of these companies. [/blockquote]

So How Is My Credit Score Calculated?

Pie Graph Showing The Percentage Of Weight Each Component Has On Your Credit Score

Payment History is 35%

Amounts Owed is 30%

Length of Credit is 15%

Credit Mix is 10%

New Credit is 10%

Now, we will go through each component in depth along with information from the VantageScore’s (from Capital One’s Credit Wise) averages and some tips to improve each area.

Payment HistoryPayment Component Of The Credit Score Pie Chart

Very High Impact On Score

Payment History is the most influential component to your credit score because it shows how responsible you are with your lines of credit. Lenders want to know that if they give you their money, you will pay them back and on time. A history of late payments can lead lenders to the assumption that you don’t prioritize your payments and they can assume that you wont treat their payment like a priority either. Paying your amount due on time is the easiest thing that you can do to to raise or maintain your credit score.

Below Average: 0%   Average: 2%-59%   Good: 60%-89%   Excellent: 90%-100%

Amounts Owed

The Amounts Owed Component To The Credit Score Pie Chart

Very High Impact On Score

The Amounts Owed component pertains to your usage of the credit line that has been given to you. Having a low ratio of used to available credit shows that you know how to live within your means even when you have money readily available to you. It proves to the lender that you are responsible with the spending power given to you and that you don’t use it just because you have the option.

[blockquote author=”” link=”” link_title=”” target=””]Its best to keep your spending per credit line below 30%[/blockquote]

According to maxing out a credit card can drop your FICO score by 45 points!

Below Average: 60%   Average: 30%-59%   Good: 10%-29%   Excellent: < 10%

Length of Credit History

Credit History Component Of The Credit Score Pie Chart


High Impact On Score

Length of Credit History is also important to lenders because it shows them how much experience you have in burrowing money. The more experience that you have using borrowed money shows that you will most likely be more responsible with the lenders money and paying it back.

It’s a good idea to open up some sort of line of credit just to establish that one account as soon as you are able to, as long as you treat it responsibly. When going through your lines of credit, never cancel out the oldest one if you can help it. That one line of credit gives your score a boost simply because of its age.

Below Average: Less than 2 years   Average: 2-7 years   Good: 8-25 years   Excellent: 25+ years

Credit Mix

Credit Mix Component Of The Credit Score Pie Chart

Low Impact On Score

Your Credit Mix is basically if you are good with different types of credit accounts. There are a few different types.

Revolving Credit – Best example of this is a credit card. The lender doesn’t require you to pay the entire balance every single month. They only make you pay a certain minimum monthly payment. Don’t get comfortable paying just the minimum payment however, this is the most dangerous mistake you can make with a credit card. It’s best to pay as much of it off as you can even though you are not required to. A revolving credit account also doesn’t just close as soon as you have it paid off, it stays open ready for use until you close it yourself.

Installment Credit– Best example of this type of credit is a mortgage, car loan, or student loans. Installment is similar to revolving in the fact that you don’t have to pay off the entire amount owed each month. The difference with Installment is that you have arranged a set payment that you will make each month for a certain amount of time. You will continue to pay this amount until the entire loan is paid off.

Having a variety of types of credit shows the lender that you are flexible on the terms of the deal. However, you should never open an account just because of hopes of helping your credit score. Each line of credit should have a defined purpose and used responsibly.

New Credit

New Credit Component Of The Credit Score Pie Chart


Low Impact on Score

New Credit is is a easy way to help your score. All you have to do is not get any new lines of credit. Its also important that you don’t inquire for new lines of credit either. Multiple new lines of credit can be a red flag to lenders. Each time someone runs your credit, it could result in an impact on your score.

There are two types of inquiries, soft & hard. A soft inquiry wont change your score. A hard inquiry however, will have a negative impact on your score. A hard pull on your credit is usually when a lender is checking your credit in the process of giving you a loan. This includes if you are applying for a auto loan, mortgage, or new credit card. This can result in a drop of your score of about 5 points.

[blockquote author=”” link=”” link_title=”” target=””]When you get a new mortgage, your credit score will drop slightly. But a few months of paying your payments on time, the score will start to bounce back. [/blockquote]

A soft pull is usually when you are getting pre-approved for a line of credit and the lender is seeing if you are someone they feel comfortable lending to. It can also be if a party is doing the credit check as a background check, such as a potential employer. This has a low impact on your score.

Below Average: 6+   Average: 5-6   Good: 3-4   Excellent: <3

VantageScore also grades you on Total Available Credit which has a low impact on your score. It is graded as shown below.

Below Average: < 2.5 K   Average: 2.5 K – 15 K   Good: 15 K – 50 K   Excellent: 50 K +

The Take Away

Now that we’ve explained what credit is and how CRA’s calculate your number, lets review some key points.

  1. When you have lines of credit, pay your payment on time. This is the most important thing that you can do, even if its the minimum amount. 
  2. Keep your inquiries and new lines of credit to a minimum. If you must open multiple accounts, try to spread them out to every 2 years.
  3. Try to keep the balance of each of your credit lines below 30% if possible.
  4. Always try to keep your oldest line of credit, even if you aren’t using it.
  5. Don’t forget that you are entitled to a free report from all 3 Credit Reporting Agencies every year.


Monitoring Your Credit Score

Its very important for you to keep an eye on your credit at all times. There are lots of businesses (including the 3 CRAs) that offer services such as life lock, identity theft, ect. to help monitor what happens with your credit. These are good to have because they monitor and alert you anytime anything changes. Changes would include things like address changes as well as new lines of credit. If you haven’t initiated any of these changes, you may freeze your accounts until you figure out what is going on before potentially getting your identity stolen. The sooner you know, the better.

Besides paid subscriptions, you can also get these alerts and free credit checks through most credit card companies. They all use a different CRA, but they will give you a rough estimate of where your score is at.

The information from VantageScore is found on Capital One’s Credit Wise application using TransUnion. You can download their Credit Wise app and check your score even if you are not a Capital One customer. It allows your to check your credit online and also on their mobile app. It updates your credit score every month and explains it using VantageScore on a report card like display. They also allow you to do credit simulations to see how certain actions will affect your credit score, then after give brief explanations as to why your score would change.

American Express also lets you check your FICO score each month on their website.

If you ever notice anything that is incorrect on your credit report, you may contact the Credit Reporting Agency and file a dispute. 

Final Thoughts

In conclusion, its not any surprise that you need to be aware of your credit score. If you have the knowledge on how your score is calculated you will be able to manage your credit score better. With a good credit score you will be able to have more spending power when it comes to buying large purchases like a house. Not only will you have more spending power, but you will also be eligible for better rates which means your payments will potentially be lower. Monitoring your credit is very easy to do with today’s technology and could save you a lot of grief if anyone were to try to take advantage of your information. As long as you are aware, and make calculated decisions on your burrowing, obtaining a good credit score is not as hard as it seems. 


Brad Patshkowski

Preparing future home owners is paramount to our customer's success and the success of our industry. The dream of homeownership is closer than you think!

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