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Credit Scores Decoded

Article and audio introduction by Samantha Kennedy, Family and Consumer Sciences

Most of us have probably heard of credit scores before, but how many of us actually know what a credit score is? And more importantly, how many of us actually know our own credit score?

Lenders use credit scores to determine whether or not a person is a good risk for things such as credit cards, mortgages, auto loans, and even insurance.  In some cases, a low credit score may actually prevent a person from obtaining a loan as they would be considered too high a risk. In most cases, however, credit scores play a large role in determining a loan’s terms and interest rate.

There are two major credit-scoring agencies: FICO and VantageScore. Both use the same factors in determining a person’s credit score, but some factors are weighted differently, resulting in a slightly different score. Scores offered through apps such as Credit Karma are usually derived from VantageScore. FICO scores tend to be used by lenders to help assess creditworthiness.

Credit scores range from 300 to 850. The lower the score, the higher the risk to the lender. In other words, having a poor credit score can make it difficult for a person to obtain a loan or can result in a lender assessing a very high interest rate.  Also, checking our own credit score does not lower it, though inquiries by lenders may.

sample credit score

Credit scores are just one of the tools lenders use to determine whether or not to extend credit to someone. Scores of 720 or higher are ideal. (Photo source: Samantha Kennedy, UF/IFAS Extension)

There are five major factors that influence credit scores.

Payment history. Thirty-five percent of a credit score is determined by a person’s repayment history. Consistently late payments on any type of debt can really damage a credit score. The more days late, the the more damage it may cause. The most important thing a person can do to improve their credit score is consistently pay bills on time.

Amount owed. Thirty percent of a credit score is determined by the amount of debt a person carries and what percentage of their available credit they are using. Ideally, a person should use less than 30% of their total available credit. The higher the percentage used, the more it negatively affects their credit score. Keep balances low on credit cards and work towards paying off debt instead of moving it from card to card.

Length of credit history. Fifteen percent of a credit score is determined by the length of a person’s credit history. This is based on the day a person’s oldest credit account was opened. If possible, avoid closing older but still active accounts, as this will reduce the total length of credit history, which can have a negative effect on total credit score.

Types of credit. Ten percent of a credit score is determined by the types of credit a person uses. Long-term debt such as mortgages and auto loans are considered “good debt” by lenders, whereas a lot of credit cards or things such as debt consolidation loans are not.

New credit. The final ten percent of a credit score is determined by the amount of new debt acquired. Again, the type of debt makes a difference. Securing a mortgage or auto loan may not have as much negative impact on total credit score as opening several new credit card accounts.

A person’s credit score determines whether or not he or she will be likely to receive a loan. A credit score of 720 or higher is ideal for getting the best rates from lenders. Credit scores can be obtained through any of the three credit reporting agencies – TransUnion, Experian, and Equifax – for a small fee. Many banks may also provide a person’s credit score for free if they have a credit account at that bank.

For more information on credit scores and related topics, please contact Samantha Kennedy, Family and Consumer Sciences agent, at 850.926.3931.

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