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You and Your Credit

The first step in managing debt is to understand credit and credit scores.

Affinity One Federal Credit Union believes in providing you with the tools and financial education you need to improve your financial life. A very important aspect of your overall financial health is your credit score. Your financial health is important to us. A credit score is a three-digit number based on the information in your credit file. It shows how likely you are to pay a loan back on time. The higher your score, the less risk you represent. Credit scores can range from 380 to 830 (the higher the better) and is a result of five basic items:

  • Payment History
  • Capacity
  • Length of Credit
  • Accumulation of Debt in the last 12 -18 months
  • Credit Mix

Credit Score

The credit score is a predictive tool on how a consumer will manage their debt in the future based on how that consumer has managed their debt in the past. There are many factors that go into a credit score, but the main factors are: payment history, capacity (how much credit is available), length of credit, accumulation of debt, and credit mix.Each of these factors has a weight and together these different weighted factors give a numerical score. A credit score ranges from 380 to 830. The higher the score the less “risky” the borrower is. The following is a brief definition of the factors that predict your credit score.

Payment History – 35%

Payment history makes up approximately 35% of the credit score. One common theme in understanding credit scoring is that time has healing power. Because of the higher weight of payment history, making consistent on-time payments monthly is extremely important to maintaining a strong credit score. Keep in mind that delinquencies stay on your credit record for seven years. The longer it has been since a negative incident has occurred, the less it will affect your score. So, if you made a payment late five years ago it will have much less impact than a payment that was late last month. The dollar amount of late payment has no impact on the score. For example, a $10 department store late payment and a $2500 mortgage late payment have the exact same impact.

Capacity 30%

Capacity represents the ability a consumer has to borrow and it makes up 30% of the credit score. If you have $50000.00 in credit limits and the balance is $49000.00 the capacity is 2%. If you have $50000.00 in credit limits but the current balance is zero the capacity is 100%. The lower the capacity the lower the credit score. A low capacity means the consumer is using all of the credit available to them and could be a riskier borrower.

What Doesn’t Impact Your Score?

  • Debt Ratio
  • Income
  • Length of Residence
  • Length of Employment

Line of Credit – 15%

The length of time that a consumer has had credit makes up 15% of their score. Length of credit is important to a lender. For instance, if a member has a high credit score but has only had credit for 6 months, there is no proven ability to maintain that high score. Time has a significant impact on your score. It is extremely important for a consumer to keep open the oldest account they have. If the oldest account the consumer has is closed, there can be significant impact on the credit score.

Accumulation of Dept

An important factor used in calculating a credit score is accumulation of debt in recent months. The more you “shop” for credit, the lower your score may drop. The more a consumer searches for credit may be an indication that he is struggling and therefore may be a riskier borrower. There are some exceptions to this rule: The credit reporting agencies give some leverage with both mortgage and auto purchases. If a consumer has several “like” inquiries within a few days or a few weeks, these do not have a significant impact.

Credit Mix

Credit “Mix” means the different types of debt a consumer might have. Installment or closed end loans raise a score. Installment loans include mortgages, auto loans, home equity loans or closed end debt consolidation loans. Revolving loans that are used or have a balance lower a score. Revolving loans include credit cards and open-end lines of credit. The number of finance companies that appear on a credit report also lower the score because finance companies tend to lend to higher risk consumers. These might be referred to as “lenders of last resort”.

How Can You Improve Your Score?

Pay down credit card balances
Make payments on time
Slow down on opening new
Acquire a solid credit history
Move revolving balances to installment loans

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