What is a credit score? A credit score is a number used to measure creditworthiness and represents how responsible an individual is. In the past, credit scores were mainly used to establish loan amounts and interest rates. However, more and more businesses use credit scores to determine fees, down payments, interest rates, and more. Electric companies and rental properties pull credit scores to determine the deposit required for services or rent. Even insurance companies are using credit scores to help predict the odds of filing a claim and raising premiums. Credit Scores can even be a factor when seeking employment; so, it’s important to understand what makes up a score.

Payment History (35%)

Making payments on time is one of the most important factors. Not making a payment or paying it late lowers credit scores. Lenders look at payment histories to ensure accounts are paid on time.   

Amounts Owed (30%)

Account balances and available credit have an impact on credit scores. High balances can indicate a person is overextended financially. A good rule to follow is the 30% rule. Only use 30% of the available credit on a line of credit. This means carrying a balance of $300 for a credit card with a $1000 limit. Maxing out credit cards negatively impacts credit scores. 

Length of Credit History (15%)

The length of time credit accounts has been established or length of time since the most recent transaction reflects positively on credit scores. Longer credit history paints a picture for lenders. The older the credit history, the more positive effect it has on a credit score. Lenders consider how long accounts have been open, how long specific account types have been open and how long since accounts were used. Generally, lenders like to see at least six months or more on one credit account. 

Credit Mix in Use (10%)

Credit scores consider a number of existing credit cards, installment loans, and mortgage loans.  However, it is not necessary to have one of each or to have only a specific category. Possessing a combination of each with good payment history can raise a credit score. People with no credit cards are viewed as higher risk compared to those having managed credit cards responsibly. Borrowers with a mix of credit accounts reveal the ability to handle all sorts of credit and represent less risk for lenders.

New Credit (10%)

Opening several new accounts in a short period represents greater risk and can negatively impact a credit score and signal financial trouble.  

Having a great credit score is important!  It allows you to borrow funds and secure better interest rates. Credit scores can range from 300 to 850. A good credit score is anything over 720. Don’t worry if your credit score isn’t where it should be. Knoxville TVA Employees Credit Union offers products, like a Share Secure Loan or credit card, to help get your score back on its feet. 

There are many ways to build and maintain a credit score! For more information on credit scores, visit GreenPath Financial Wellness for free financial advice!