You probably know that your credit score is important, and that it influences your lender’s decision to approve a loan.

But you may have some questions: How are credit scores calculated? What affects your credit score? What hurts your credit score?

The calculation works like this:

• A credit report is generated when you engage in a transaction like applying for a loan or paying it off.
• Credit reports go to credit bureaus — in the U.S., the main three are Equifax, Experian, and TransUnion.
• The two main credit scoring companies, FICO and VantageScore, collate the information to yield a credit score.

FICO and VantageScore each have unique methodologies, but their numbers are comparable because they assign similar levels of importance to the same factors. FICO produces a number between 300 and 850, spanning “poor” to “exceptional.”

VantageScore 3.0, the latest version that Citadel Credit Union members can use for free in Online & Mobile Banking, is also calculated on a scale of 300-850 and was developed by a team of statisticians, analysts, and credit data experts from each of the credit reporting companies.

The Top Two Factors That Affect Credit Score

What are the two factors that affect credit score the most? FICO and VantageScore agree:

• Payment history
• Credit utilization

This means that some financial decisions related to history and utilization can be surprisingly impactful:

• Putting off paying back missed payments: Payment history accounts for 35 percent of the FICO calculation and 40 percent of the VantageScore. Punctual payments improve your credit score, while late or missed payments detract from it. And unfortunately, the penalty you receive for missing a payment can get worse: your score continues to decrease the longer you leave a past-due payment.
• Using more than 30 percent of your available credit: Credit utilization — also known as “credit usage” or “amounts owed” — comprises 30 percent of the FICO total and 20 percent of the VantageScore. They look at the difference between your upper credit limit and the credit you’ve used. So, carrying a balance can have a surprisingly strong effect on your score. Ideally, keep your debt below 30 percent of your available credit.
• Timing your payments around your statement: It’s wise to consider timing, too. Paying down your balance before you receive your monthly statement may help improve your credit utilization ratio. Issuers typically report to credit bureaus around statement time. It can look like you have a high utilization rate if your statement shows you’ve used too much credit in a month, even if you pay it off on time.

3 Financial Factors to Keep in Mind

Together, FICO and VantageScore look at five factors when calculating a credit score. What are the final three?

• Length of credit history (15 percent of your FICO score)
• New or recent credit approvals or applications (10 percent)
• Credit types and mix of accounts and products (10 percent)

These factors mean that some surprising financial decisions can affect your credit score.

• Closing an old credit card: Because the length of the credit history is a factor in your credit score calculation, your oldest accounts are doing you a favor by increasing the average length of your credit history. If you close one — or if a lender closes it due to inactivity — it can decrease your overall credit score. Closing a credit card can also impact your credit utilization ratio or your credit mix.
• Opening a new credit account: Opening a new credit card affects your score by reducing the average length of your credit history. Also, every time you apply for credit, the lender pulls your credit report for review. These “hard inquiries” remain on your credit score for two years and cost you a small amount (around five points) for one year. If lenders see too many hard pulls, they may question your financial stability.
• Successfully managing multiple types of loans: Worried about how a mortgage, home equity line of credit, or car loan could impact your credit score? Good news: they may benefit from it. Your credit score goes up when you have different types of revolving credit and installment loans — as long as you consistently make your payments. Of course, you shouldn’t take out loans you don’t need just to boost your credit mix. Your credit score will suffer if you can’t control your debt. But a solid record of credit activity, history, and diversity can serve you well.

Credit Scores Can Change

Since so many things affect credit scores, they inevitably fluctuate over time. If you’ve been through a rough patch and are concerned about your credit report, remind yourself that low scores don’t last forever.

You can keep an eye on your detailed credit report, get real-time credit monitoring alerts, and use the credit score simulator in Citadel’s Online & Mobile Banking to see how a purchase or loan you’re considering may affect your score.

By planning for your financial future, adhering to your budget, and making more informed decisions, you can get back on track—and if you’re not sure where to begin, a financial advisor is a great place to start.

Learn more at Citadel Credit Union.