Credit, What is it?

Credit is a part of our daily lives, but what really is a credit report and score? Credit reports and scores are used not only by banks and lending companies, but also by landlords, utility companies, insurance companies, and many others. Your credit report and score are the primary factors used in determining creditworthiness. A credit score is generated using data from your credit report, which may not necessarily be included in your credit report. Ultimately, your credit will be the main focus in determining your lendability, or your ability and willingness to repay a loan.

Credit Reporting & How it Works

There are three main credit reporting agencies: TransUnion, Experian, and Equifax. Each of these agencies has many sub-bureaus as well, which can sometimes lead to a discrepancy in credit scores across each of these bureaus. While no one outside of these agencies truly knows what factors are used in generating a credit score, it is generally accepted that there are five main factors that make up your credit score.

Payment History (35%)

Your payment history includes exactly that—do you make your payments on time, and if not, how late are you—but it also includes any amounts owed to Collections if you have any charged-off debt, settlements, repossessions, foreclosures, or bankruptcies. This factor also looks at the amount of time since your last delinquency.

Amounts Owed/Credit Utilization (30%)

This factor is comprised of the amounts owed on your current loan balances compared to the original balances and, also, your credit utilization ratio for revolving debt. Your credit utilization ratio is calculated by taking your current balance of revolving debt and comparing it to the credit limit of said debt. For example, if you have a $10,000 credit card and a balance of $4,500, your credit utilization ratio would be 45%. Remember, less is always better in this situation, whether it is the balances of your loans or the utilization ratio of your revolving credit.

Length of Credit History (15%)

How long have you had credit, and what is the average age of all of your accounts? Although this factor is weighted third overall, a more established credit history will have a greater impact overall than a shorter history.

Credit Mix (10%)

Your credit mix includes all of the types of accounts that you have open, including installment loans, mortgages, lines of credit, credit cards, and store accounts. Having a variety of accounts is beneficial for your credit mix. However, this factor has a more limited impact on your score.

New Credit (10%)

New credit takes into account hard inquiries on your credit report. Typically, hard pulls are done by a creditor when applying for a new loan or revolving account. While this factor has a lower impact than others, numerous credit pulls within a short period of time can bring your score down. However, the bureaus do have the ability to recognize when someone is rate shopping and will not penalize a credit score for that.

Overall, credit is an important part of life, as it can help you get what you need now based on your promise to pay later. Additionally, borrowers with good credit scores will find that they are receiving better interest rates and terms than borrowers who have poor credit. When considering taking on new debt, it’s important to remember the factors involved in building your credit to ensure that you don’t put yourself in a poor position for the future. At ONE Federal Credit Union, we are always more than happy to sit down with our members to discuss your credit and ways to improve it!

Marissa Webster Operations Supervisor