Financial Advice

Everything You Need to Know About Credit Scores

Your credit score is important, and it can have a big impact on your future. Understand what your credit score is made up of, how to build good credit, and what steps you can take to stay in control.

Published Apr 7, 2021 | Updated May 8, 2024

UFCU Financial Health Program Manager Monica Munoz Andry joined us this morning in the studio to talk all about credit scores.

Break it down for us — what is a Credit Score?

A credit score is a three-digit number that represents the credit worthiness of an individual based on factors from their financial history. In short, it tells lenders how likely you are to repay them. Credit scores can have a big impact on your life, like whether or not a lender approves you for a loan as well as what interest rate you are charged. Generally, a high score means you’ll receive better loan terms and lower interest rates.

Why is a Credit Score important, and how can it impact you?

Credit scores range from low to high, and a low credit score could cost you thousands of dollars. For example, let’s compare a $20,000 car note over 5 years for a person with excellent credit versus low credit. A loan at a 2% interest rate, compared to a 15%, interest rate adds up to a difference of $7,550 in interest paid over the life of the loan!

That’s real money that you could have used to save, go on vacation or buy another car! You’ll notice the payments only differs by $126, so it’s important to pay attention to the interest rate you are paying and not just your monthly payments.

Other impacts of a low credit score can be that lenders may deny you a loan, period. Apartment deposits and insurance premiums are also often based on your credit score.

Okay, now I know why credit is important. Help me understand what factors determine my credit score?

Payment history is 35% of your score. If you do nothing else, always pay your bills on time every month. A late payment has the biggest negative impact on your score, and it will show up on your credit report for 7 years. Keep in mind that late payments are normally not reported until 30 days late.

The second category is your Amount Owed — 30% of your credit score. This refers to how much of your available credit is being used. If you cannot pay the balance in full try to keep at least 70%-80% of your credit lines available. Once you charge over 30% of your credit line, you start losing points in this category. People wonder why their credit score isn’t higher if they pay everything perfectly and on-time, and it’s usually the amount owed that’s a problem. It’s a myth to get a credit card and max it out and pay the small monthly minimum to show payment history. The minute they max out the card, they lose 30% of the points used to rate their score.

The third category is Length of Credit History — which is 15% of your score. Keep your oldest cards open, even if there’s no balance and you don’t use it, to show how long you’ve been credit-worthy.

The fourth component represents 10% of your score, and it’s New Credit. Be selective about the credit cards you accept and avoid opening too many in a short amount of time.

The last category is Mix of Credit, which is also 10% of your score. It’s good to have a diversity of debt types, like installment loans, which are your car and mortgage loans, and also revolving loans, which are your credit cards and lines of credit.

Wow, that is all great information, and there’s a lot that goes into scoring. What are one or two things we can do to start to get a good credit score or improve it?

The number one thing you can do to get a good credit score is to make your payments on time. And second, keep as much available in your credit lines as possible. Do not max out your credit cards, and try to pay the balance off in full each month if you can.

If someone is looking to build or rebuild credit, where should they start?

One of the best ways to build or rebuild credit is with a secured loan or credit card. These products are limited to your savings, where your credit line is equal to the amount you have on deposit. They are little risk to lenders as funds can be claimed if you fail to pay.

Also, UFCU offers a free 30-minute credit review where you can learn the ins and outs of credit and review your credit report to identify opportunities for improvement.

Again, we’re thrilled to have UFCU representative Monica share financial advice regarding credit scores.