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Many people don’t think much about their credit scores. They assume everything will work out when it’s time to apply for a credit card, finance a car, or take out a loan. However, this three-digit number that summarizes your credit history can have a much bigger impact on your financial life than you might realize.

Let’s take a closer look at what a credit score is, how it’s calculated, and why it matters. We'll also discuss some practical ways to monitor and improve your score so you can put yourself in a better financial position.

What Is a Credit Score?

A credit score is a three-digit number that reflects your creditworthiness. It tells lenders how likely you are to repay borrowed money on time. It's calculated based on your credit history, including how you've managed loans, credit card accounts, and other debts over time.

There are two types of credit scoring models: FICO and VantageScore. FICO, developed by the Fair Isaac Corporation, is the most widely used model in the U.S. VantageScore is a newer model created by the three major credit bureaus (Equifax, Experian, and TransUnion). Both models use a credit score range of 300 to 850.

Here’s a quick breakdown of how credit scores are typically categorized:

Lenders use credit scores to make decisions because they are quick to obtain and easy to understand. Your credit score summarizes the information in your credit report and helps lenders understand how likely you are to make payments on time when you apply for an auto loan, credit card, or other credit.

Why Your Credit Score Matters

Your credit score doesn’t just affect your ability to qualify for loans. It can affect many areas of your life. For example, if you’re renting an apartment, your credit score will likely be checked to make sure you can pay your rent on time. It may be checked again when you apply for utilities. Also, some employers will review it when you apply for a job to assess your financial responsibility.

Your credit score also plays a major role in the terms you receive when borrowing money. Applicants with higher scores typically qualify for better rates and more favorable loan terms. The savings can be significant. For example, with a mortgage loan, even a 1-2 point difference in the interest rate could result in tens of thousands of dollars in savings over the life of the loan.

If you’re applying for a credit card, home equity loan, or home equity line of credit (HELOC), your credit score can also impact your credit limit. Applicants with higher credit scores typically receive higher credit limits. A good credit score can affect your total available credit when financing home renovations, medical bills, or large purchases.

How Is a Credit Score Calculated?

If you’re wondering, “What affects your credit score?” it isn’t just one or two things. The credit bureaus calculate your score using information from your credit reports. They consider whether you made your payments on time, how much of your available credit you are using, how long you’ve had your credit accounts, and other information. Some of these details have a bigger impact on your score than others.

The main credit score factors include:

• Payment history: 35% 
• Credit utilization: 30%
• Length of credit history: 15%
• Credit mix: 10% 
• New credit inquiries: 10% 

Payment history

Simply put, your payment history is whether you paid your bills on time. It accounts for 35% of your credit score, making it the most important factor. It may include payments for your utilities, cell phone, internet, insurance premiums, rent, and other amounts you owe. 

Your creditors report both your on-time and late payments to the credit bureaus. On-time payments can help improve your credit score, while late payments may harm your score. For example, if you make consistent, on-time credit card payments, the credit card company will report those payments to the credit bureaus, and they will be reflected in your credit score.

Credit utilization

The credit utilization ratio is the next-largest factor affecting your credit score. It makes up 30% of the total. The credit utilization rate is the percentage of your available credit you are currently using. 

To calculate your credit utilization ratio, divide the total amount of credit you’re using by the total amount of credit available to you.

For example, if you are currently using $1,000 of your available $5,000 credit, your credit utilization ratio is 20% ($1,000 / $5,000). 

Lenders typically prefer credit utilization ratios of 30% or less to ensure you aren’t overextended. One of the most common ways credit utilization is increased is by carrying a high credit card balance. Paying it down may improve your score over time.

Length of credit history

The age of your credit accounts makes up 15% of your credit score. A longer credit history gives the credit bureaus more time to evaluate how well you manage credit. That’s why it’s important to keep old credit accounts open, even if you are no longer using them. For example, if you close your oldest credit card, your average account age may decrease, which can lower your score, even if your other accounts are in good standing.

Credit mix

Credit bureaus want to see that you can manage different types of credit. This is the credit mix, which accounts for 10% of your score. 

The credit mix demonstrates that you can responsibly manage revolving accounts and installment loans. For example, credit cards require you to manage revolving balances. Installment loans, like auto loans, student loans, or mortgages, involve fixed monthly payments over a set period. 

New credit inquiries

How often your credit is checked makes up the final 10% of your credit score. There are two types: hard inquiries and soft inquiries. Hard inquiries can impact your credit score, and they are typically performed when you apply for a loan or credit. Soft inquiries don’t affect your credit score, and they are typically performed when you check your own score, lenders prequalify you for offers, or employers and landlords perform background checks.

When you apply for several loans or credit accounts in a short period, it can look like you are relying too much on credit. As a result, frequent hard inquiries may temporarily lower your score by a small amount. Hard inquiries may stay on your credit report for up to two years.

How to Check Your Credit Score and Credit Report

Monitoring both your credit score and credit report is an important part of maintaining your financial health. Regular monitoring can help you prevent fraud, catch errors early, prepare for loans, and track your progress over time. 

It’s a good practice to check your credit report at least once per year. You’re entitled to one free copy each year from the three major credit reporting bureaus (Experian, Equifax, and TransUnion). These free reports can be obtained from AnnualCreditReport.com. If you notice any incorrect information, be sure to dispute it with the reporting bureau immediately. If you suspect credit card fraud, report it immediately to Card Connect and deactivate the card to prevent unauthorized purchases.

One of the easiest ways to check your credit score is through online or mobile banking with your bank or credit union. It’s a good idea to check your score at least once per year or before making a major financial decision.

How to Improve Your Credit Score Over Time

If your credit score is low, it doesn’t have to stay that way. There are several steps you can take to improve it over time. Keep in mind that it may take several months to see progress.

Here are some ways you can improve your score:

• Always pay bills on time: Set up autopay, text reminders, or payment alerts through online or mobile banking to avoid late or missed payments.   
• Pay down credit card balances: Reducing balances can help lower your credit utilization ratio.   
• Keep older credit accounts open: Even if you no longer use them, older accounts can help increase the average age of your credit history.   
• Limit applications for new credit: Apply only when necessary to avoid multiple hard inquiries in a short period.   
• Diversify your credit responsibly: If you only have credit cards, consider adding a small installment loan (or vice versa) to help improve your credit mix.   
• Review your credit reports: Check your credit reports at least once per year for errors or unusual activity. If you spot anything, dispute it immediately.

Take the Next Step Toward Better Credit

At Heritage Community Credit Union, we offer a variety of tools to help you take control of your finances and build stronger credit.

With Money Management, you can view all your accounts in one place, including those with other financial institutions, to track your spending and watch your budget. Card Connect makes it easier to manage your cards by allowing you to set spending limits, add cards to digital wallets, redeem rewards, report lost or stolen cards, and turn your cards on or off when needed.

Our Rate Saver Credit Card can also help with debt consolidation, which may reduce your credit utilization ratio and simplify your payments. There’s no balance transfer fee or annual fee, and you won’t pay interest on transferred balances for the first 12 months.

Ready to take the next step? Contact us today. Our friendly team is here to answer your questions and help you find the right financial solutions for your needs.

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