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Everyday Finances

How Credit Scores Work

By February 28, 2018May 26th, 2024No Comments

Ah, the credit score…just thinking about it can trigger feelings of unease, uncertainty, and unhappiness. When we depend on this number for so many important things in life, it’s normal to feel some anxiety. Much of this anxiety comes from not knowing how it’s calculated or from feeling like you don’t have control over your score. The first step to feeling more in control—and less anxious—about your credit score is understanding how it’s calculated. We’re here to help clear the air and let you in on how a credit score works and what it says about you.

What is a credit score?

Your credit score is one piece of information about you that lenders use to decide whether or not to approve you for a loan. Your borrowing and payment history is analyzed to produce your credit score, which is designed to help lenders determine how risky it would be to loan you money. But to understand how that number comes about, you have to look at the big picture first.

Back before credit scores, credit unions and banks used to go on an investigative journey before they loaned people money. They scoured multiple reports from credit bureaus to look for evidence based on a borrower’s history. After this drawn-out process, they determined how likely a person was to repay a loan.

What factors determine your credit score?

Nowadays, a computer program reads the same credit bureau documentation and boils it down to a three-digit number which is determined by five major factors:

  • Payment history
  • Debt usage
  • Age of credit accounts
  • Types of accounts
  • Number of inquiries on your credit

Payment history is the most important factor. It’s simply a record of how timely your payments have been in the past. That is, whether you’ve paid your bills on time.

The second most important factor is debt usage, which is a bit more complicated. It looks at your “utilization ratio”, which is how much of your credit you’re using versus what you have available. For instance, if you have a credit card with a $10,000 limit and you‘ve charged $5,000 to the card, then you have essentially used half of your available credit. The more of your available credit you’re using, the less confident lenders are that you’ll make timely payments on any new debt.

The third factor, the age of your credit accounts, shows the average age of your accounts and how long they’ve been active. Someone with a longer credit history is generally seen as more creditworthy than someone who recently applied for credit for the first time. A longer history creates more information about whether you can be trusted to pay your bills and manage debt obligations. However, a shorter credit history may hinder your ability to secure credit and/or may limit the ability of a lender to extend credit to you. Similarly, a shorter credit history may also have an adverse affect on your credit score.

The next factor, types of accounts, lets lenders know the variety of accounts you have open. If you have a good mix of accounts going (i.e., mortgage, credit card, car loan, etc.) and are able to manage them effectively, lenders may be more likely to loan you money. This indicates you are able to handle different types of debt.

The smallest factor, credit inquiries, shows the frequency of credit checks. The more credit inquiries—in the form of credit card or loan applications or checks of your credit score by employers or others—, the more it hurts your score. Hence, if someone   is constantly applying for new credit or their credit worthiness is constantly being reviewed, then this is a likely indicator that they may be a higher credit risk.

Is there only one type of credit score?

While there are dozens of types of credit scores out there, the most commonly known score is your FICO® score. FICO® (which stands for the Fair Isaac Corporation) developed this general-purpose score in 1989. It uses all of your credit information to form a  cumulative number. Signal Financial FCU members who have one of the new credit cards (which were issued  in October 2017) have access to their FICO® Score on their credit card account statements.

You may also see something called a VantageScore. The three major scoring agencies, Equifax, Experian, and TransUnion, joined forces in 2006 to create this scoring system. While these multiple scoring systems may seem like a lot to process, don’t worry. They all rely on one thing: how responsible you are with your money.

What does my credit score mean?

Well, as you probably guessed, the higher your score, the more perks and benefits you’re likely to be offered. People with high scores tend to be offered lower  interest rates and higher loan amounts or spending limits, which result in greater  financial flexibility. 

If your score is lower than you’d like it to be, don’t fret. There are plenty of ways you can raise that number!  Methods such as automatic payments, making payments twice a month (instead of once), requesting a credit limit increase, opening a new account and  negotiating outstanding balances are all viable options.  However what you choose to do depends on your specific situation and your ability to manage the chosen course of action.  . For more information on this topic  click here. (

For more information on FICO® Scores and the credit scoring process, visit our website:

We hope this blog has been enlightening. Go forth with financial confidence!

FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

Signal Financial Federal Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Signal Financial Federal Credit Union and Fair Isaac do not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating.