A Guide to Understanding Credit Scores

Your credit score plays a crucial role in your financial life, but do you understand exactly how it works or how it’s calculated? Understanding your credit score is key to managing your financial well-being. Whether you’re looking to apply for a loan, get a credit card, or buy a house, your credit score can affect the rates you qualify for and even determine whether you’re approved. Simply put, the better your credit score, the better your interest rate—which means more money in your pocket. Let’s break it down.

What is a Credit Score?

A credit score is a three-digit number typically ranging from 300 to 850 calculated to indicate creditworthiness. In general, the higher your score, the more likely you are to repay borrowed money. A good credit score can unlock better loan terms, including lower interest rates, which saves you money over time.

Why Your Credit Score Matters

Any institution that lends money – credit unions, banks, credit card companies, financing companies, mortgage lenders, and others – can use a credit score to help them assess whether you meet their lending criteria. These institutions use your credit score along with other relevant information provided by you, such as income, work status, and down payment amount. In general, higher scores allow access to more credit at competitive rates.

Insurance carriers can also use credit scores to help assess risk and to accurately price homeowners and automobile insurance policies.

FICO® Score vs. VantageScore

The two most common credit scoring models are the FICO® Score and VantageScore. Although both are designed to predict creditworthiness, each scoring model places varying levels of importance on the factors they evaluate. This is why you might notice that your FICO® and VantageScore credit scores are slightly different, even though both are based on the same credit report.

• FICO® Score: Developed by the Fair Isaac Corporation, the FICO® Score ranges from 300 to 850. FICO® Scores are based on five key factors: payment history, credit utilization, length of credit history, types of credit in use, and new credit. 

• VantageScore: Created by the three major credit bureaus (Experian, Equifax, and TransUnion), VantageScore also ranges from 300 to 850. While it considers similar factors as the FICO® Score, it uses a different algorithm and weighs certain factors differently. For example, VantageScore places a heavier emphasis on recent credit behavior and allows for a wider range of credit profiles, which can help consumers with limited credit history.  

What Factors Go into a Credit Score?

A credit score is calculated from the information in your credit report and considers 5 factors. It is important to know that your score does not take your age, income, employment, marital status, or your bank account balances into account.

• Payment History: Lenders prioritize your ability to make payments on time. This is the most significant factor in your credit score. Late payments, defaults, and bankruptcies can significantly lower your score, making it crucial to maintain a consistent, on-time payment record.
• Credit Utilization: This refers to the ratio of the credit you’ve used to your total credit limit on revolving accounts, like credit cards. Ideally, it’s best to keep your credit utilization below 30%. Keeping balances low demonstrates responsible credit management and can boost your score.
• Length of Credit History: The longer you’ve had credit, the better. In general, the longer your credit history the better, particularly accounts with a good payment history and no late payments.
• New Credit: When you apply for new credit or a lender checks your credit report for a loan or credit card, it results in a hard inquiry. Multiple hard inquiries in a short period can negatively impact your score, as they may signal financial stress or a higher risk to lenders. It’s best to avoid opening several new accounts within a short timeframe.
• Credit Mix: Having a mix of credit types, such as revolving credit (credit cards) and installment loans (mortgages, student loans), can positively impact your score. Demonstrating responsible use of both types indicates a well-managed credit profile.
• Available Credit: This factor, considered only in the Vantage Score, is the total credit limit you have available. Higher available credit can be beneficial in improving your credit utilization ratio, but keep in mind, it only accounts for 2% of your VantageScore credit score. It’s important to manage your available credit wisely to avoid going into too much debt and to keep a balance that lets you use your credit without putting yourself in a tough spot.

Although your credit score plays a key role in lending decisions, it’s important to remember that it’s not the only factor lenders consider. Other criteria often used in lending decisions include:

• Loan-to-Value Ratio (LTV): Lenders evaluate the ratio of the loan amount to the value of the asset being financed, such as a home or car.
• Income: Your current income helps lenders assess your ability to repay the loan.
• Employment and Work History: A stable employment history and current job status provide reassurance to lenders about your financial stability.

What is a Good Credit Score?

Credit scores typically range from 300 to 850. A higher score means lenders are more confident in lending you money. Here’s a look at how the VantageScore 3.0 model is rated:

How to Improve Your Credit Score

While there are some general steps you can take to build and maintain good credit, many strategies for improving your credit score will be specific to your situation and credit history. Here are some key actions you can take to boost your score:

1. Pay Bills on Time, Every Month: Payment history is the largest factor in your credit score, so if you’ve always made your payments on time, keep it up. If not, make it a priority to get caught up. Consider setting reminders or automating payments to avoid missing due dates.
2. Reduce Credit Card Balances: Although experts often suggest keeping your credit utilization below 30%, there’s not a specific percentage that automatically improves your score. Credit utilization—the ratio of your card balance to your credit limit—plays a significant role in your score. If you carry a balance, aim to pay it down as much as possible and work toward paying it off in full each month. Making multiple payments throughout the billing cycle can further lower your utilization, which may help your score gradually improve.
3. Limit New Credit Applications: Each time you apply for new credit, it results in a “hard inquiry,” which can slightly lower your score. Try to apply for credit only when necessary and avoid opening multiple new accounts in a short span.
4. Review Your Credit Report: Errors on your credit report can unnecessarily lower your score. Request a free copy of your credit report from the major bureaus, or visit annualcreditreport.com to check for any inaccuracies. If you find any, dispute them promptly to ensure your score reflects an accurate picture of your creditworthiness.
5. Build Up Credit History: Maintaining a timely payment history for a mix of accounts (e.g. credit cards, auto, mortgage) over a long period can improve your score. Remember, the quantity of loans is not as important in credit scoring as the quality of how well those accounts are managed. In other words, your score is more positively impacted by keeping loans in good standing without missing payments.

Park View is Here to Help 

At Park View Federal Credit Union, we want to help you take control of your financial future. Whether you need help improving your credit score, want to explore loan options, or have questions about your financial goals, we’re here for you. Our consumer lending team and mortgage lending team is dedicated to guiding you every step of the way, helping you navigate the complexities of credit and lending with confidence. 

As a Park View member, you can also enroll in Credit Score and More through online banking. This free tool provides daily access to your credit score and report, real-time credit monitoring alerts, a credit score simulator, personalized tips for improving your credit, and more. You’ll also receive special lending offers tailored just for you. It’s all part of our commitment to helping you manage your credit with ease and achieve your financial goals.