Tips for understanding your credit score
The three main credit score companies (also known as credit bureaus or credit reporting agencies) in the United States are:
- Equifax
- Experian
- TransUnion
These companies collect and maintain consumer credit information, which they use to generate credit reports and calculate credit scores. While each bureau may have slightly different information and scoring models, all three play a major role in determining your overall credit health. We will review the FICO score, which is the primary metric most lenders use to assess your creditworthiness. The FICO scoring system ranges from 300-850. It is based on five elements:
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Inquiries (10%)
Paying off Debt
Canceling a credit card to avoid temptation makes sense, but if the card has a high limit and no annual fee, you may be better off keeping the card to maintain low credit utilization.
If you have $10,000 in available credit across all your cards and your combined balance is $1,500, your credit utilization is 15%. If you close a credit card after paying it off, you reduce the total amount of credit available to you.
Credit History
Getting out of debt can wipe out some of your credit history. The scoring algorithm awards you more points the longer you have a record of dealing with cards and loans. If you cancel a card or pay off a loan, the length of your credit history may decrease if that account is no longer included in the calculation.
Credit Mix
The scoring system loves to see a mix of different types of credit, such as a car loan, a mortgage, and a couple of credit cards. When you pay off a loan, it can reduce your credit score mix.
If your credit score does fall after paying off debt, don’t worry, it will work itself out over time. The decline will likely be small – credit history and credit mix have a combined weight of only 25%. Never regret paying off debt and moving toward financial freedom!
Brewery Credit Union’s SavvyMoney Credit Score is available through online and mobile banking. SavvyMoney Credit Score is a free service offered to help you understand your credit score, give access to your full credit report, provide credit monitoring alerts, simulate and learn ways to improve your score and see ways you can save money on new and existing loans. Login to online banking to see your score.
