How Credit Scores Are Calculated

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If you’ve applied for a car loan or a mortgage lately, you’ve probably heard someone mention your credit score. It’s also likely you’ve read articles or blog posts about how to improve your score.

Paying bills on time and keeping credit card balances and other debt under control can move the needle in the right direction. But that’s only skimming the surface. To figure out the best way to improve your credit score, it’s a good idea to learn how it’s calculated.

What Is a Credit Score? 

Your credit score is meant to measure your level of financial responsibility and how likely you are to repay a loan. It’s based on several factors, including payment history, debt, the kind of credit you’ve had and how long you’ve had it.

The most widely used score is from a company called FICO, which rates consumers on a 300 to 850 scale. If your score is much below 650, you’ll pay high rates on loans and credit cards, if you qualify at all. Once you reach 700 or so, you’ll get the best interest rates. FICO scores aren’t just used by banks and other lenders. Insurance firms, landlords and even employers use them to help determine how responsible you are.

Three agencies provide scores to the public: Experian, Equifax and TransUnion. Free annual credit reports are available through each. You can request a report through or reach out to the financial experts at Piedmont Advantage Credit Union to help you start the process.

Credit Score Criteria

Figuring out your credit score is a lot harder than, say, computing a student’s grade point average or a car’s fuel mileage. By one estimate, about 36 billion pieces of data are used to create scores for 220 million American consumers. Here are the main factors:

► Payment History

Weight: 35% of score

Explanation: It’s no secret that overdue bills, loans and credit card payments are score killers. But ratings firms dig even deeper and factor in how late your payments are, how much is owed and how recently you missed a payment. Bankruptcies and foreclosures are also considered.

Tip: We all lead busy lives and it’s easy to forget payment due dates. At Piedmont Advantage Credit Union, you can use our online and mobile banking tools to eliminate that worry by scheduling bill payments ahead of time. 

Amount Owed

Weight: 30% of score

Explanation: It’s not quite as simple as keeping your debt in check. Credit agencies compare your total debt to the amount of borrowing power available to you. They examine how close you are to credit card limits and instruments like home equity lines of credit. If you have a cushion that allows you to quickly access money, you’re considered to be a better credit risk.

Tip: Don’t max out your credit cards, aggressively pay down your balances and consider applying for a credit card through Piedmont Advantage Credit Union with a lower interest rate and no annual fee. Also, think twice before cancelling a credit card. While that might reduce your temptation to spend, you’re also eliminating some of the credit cushion that rating agencies value.   

Length of Credit History

Weight: 15% of score

Explanation: Rating firms look at how long your oldest accounts have been open. They want evidence you’ve reliably made on-time payments over a lengthy period. Young people, especially those with student loans, are often wary about adding debt, but avoiding it completely can impact your credit score.

Tip: Paying bills on time is a great way to start building your credit rating. Consider taking on manageable debt as well, perhaps with a credit card meant to help you build a credit history, or a modest auto loan.

Current Credit Mix

Weight: 10% of score

Explanation: Not all debt is the same. Credit cards are known as revolving debt, since you draw on money as you need it, pay it back, then use it again. Auto loans and mortgages are examples of installment loans: you borrow once and then make monthly payments. Creditors like to see that you’re able to manage multiple types of loans.

Tip: If you want to improve your credit mix, a home equity line of credit is a valuable revolving loan option, while a regular home equity loan can be a useful way to obtain an installment loan. Either one can give you resources to renovate your house, buy new furniture or take a special trip.

New Credit

Weight: 10% of score

Explanation: Rating agencies don’t just look at how many credit cards and outstanding loans you have. They also look at how many you’ve applied for recently. A flurry of new activity can be a sign of personal financial trouble.

Tip: As your go-to destination for loans and credit cards, Piedmont Advantage Credit Union cares about your overall financial health. We offer a variety of resources to help you get started and improve your credit rating.

Contact us or visit one of our North Carolina branches to learn more about your credit score and financial counseling opportunities for our members.

Piedmont Advantage Credit Union in North Carolina offers valuable banking solutions including checking accountssavings accountsmortgagesauto loansCDsIRAs and more. Bank online, with our mobile app, or visit one of our conveniently located branches in Winston-SalemEdenMooresvilleCharlotteGreensboroWilmington and Kenansville, NC.

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