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That three-digit number can be expensive – learn how to get it to work for you and not against you.


That three-digit number can be expensive – learn how to get it to work for you and not against you.

We live in a world where, for most people, you need to have established credit in order to buy things like a house or a car. A lot of times we don’t understand how that credit works or how the score is determined, and it can end up cost you a lot of money. Lower scores mean higher interest rates which mean higher payments. Let’s discuss the workings of the credit score and hopefully by the end of this you will have a better understand on how to raise your score and lower those interest rates which in turn will keep more of your money in your pocket.

Credit Score

A credit score is a number or a probability that indicates the likelihood members will pay a loan or credit card on time. Lending decisions are based on one major factor – the likelihood of repayment. The score is an indicator as to the chance a member will be delinquent in the next 24 months.

FICO (Fair Isaac Company):  FICO was founded in 1956 using a scoring model to calculate an algorithmic predictor based on 5 key areas. Those areas are: Payment History, Capacity, Length of Credit, New Credit, and Types of Credit.

When your Credit Union pulls your credit report, we reach out to one of the three bureaus (Equifax, Experian, & TransUnion) and we request your information. The information that is returned is based on what institutions share with each bureau. Some institutions only report to specific bureaus while others may report to all three. When we request your information, the bureau applies the FICO algorithmic scoring model to the information and supplies us with a three-digit score.

Let’s dig into the five key areas of the scoring model so you can better understand the score.

Let’s dig into the five key areas of the scoring model so you can better understand the score.

Payment History

Payment history is the most important area of your score. It makes up 35% of your overall score and is calculated on four components.

a. Frequency:  how often is your history negative (delinquencies, collections, etc…)

b. Severity:  how bad is your history negative (30 days delinquent vs 90 days delinquent)

c. Amount Owed:  how much is your history negative ($100 delinquent vs $2,000 delinquent)

d. How Recent:  how recent is the history negative (more recent negative history has a larger impact than older negative history) This actually gets broken down even further:

i. Last 12 months has a 93% impact of the payment history

ii. 12 to 24 months has a 60% impact of the payment history

iii. 24 to 36 months has a 44% impact of the payment history

iv. 36 to 48 months has a 33% impact of the payment history

v. Older than 48 months has a 22% impact of the payment history

As you can see only time can heal payment history. There is no easy fix on this key area.


Capacity is KING! This key area makes up 30% of your overall score and has the power to immediately impact the score. The capacity of a borrower is reflective of the borrowing power that a member owns. Credit cards are the focus of this area. If you have a credit card with a limit of $1,000 and you have a $100 balance, then you have $900 available to you (or you have $900 of borrowing power). If you have high debt with low capacity your score will drop. But, if you have low debt with high capacity, then you can drive your score up.

You have heard that maxed out credit cards can hurt you? That’s true! In theory, if you have a $1,000 credit card with a $1,000 balance then you have ZERO capacity your score will be down. But, if you pay off the balance in full, then the next time the credit score calculates with the paid off balance, your score potentially could rise by up to 100 points.

Sometimes it is as easy as consolidating high balance credit cards into a personal loan that will allow your score to rise quickly.

New Credit

This key area makes up 10% of your overall score. The effect on this is two-fold: the date of the inquiry and what industry is requesting credit. A member can apply for the best rate on an auto loan from seven different lenders, which would have resulted in seven inquiries in a few days. Since those are initially “under 30 days old” they count as 0 inquiries in your FICO score. After 30 days they count as 1 inquiry because they are within 45 days of each other.

Multiple inquiries of the same industry will not affect your score if they are all done inside of 45 days.

Length of Credit

This key area makes up another 10% of your overall score and is simply calculated based on how long each line of credit is active. Any line of credit that has zero activity for at least 6 months will have ZERO impact on your score.

Types of Credit

This key area makes up the final 15% of your overall score. It is judged based on the balance of installment (auto/personal) loans vs revolving (credit card/line of credit) vs mortgage loans. If you do not have any revolving credit then you will miss out completely on the Capacity area (30% of your score) plus part of this 15% will have a negative impact.


Other Items Impacting Your Score

Here are a few items that can also have negative impacts on your credit score.

  • Late payments and derogatory public records (i.e. collections, judgements, tax liens, etc…) will impact the Payment History area of your score which makes up 35% of your overall score.
  • Closing revolving accounts (credit cards), especially those that have been open a long time. This potentially impacts 2 areas. Capacity will be impacted because you are taking away the borrowing power of that account. Also, Length of Credit will be impacted because you are removing an account that has been active for a long time and closing it. This is potentially a total of 40% impact (30% for Capacity and 10% for Length of Credit).
  • Having a lender lower the limit on a revolving account or not report the limit on one. There should rarely be a situation where you should do something like this, but know that if you do it will have a negative impact to the Capacity area of your credit score.
  • Multiple new accounts in a short period of time. This will impact at a minimum three key areas:  New Credit, Length of Credit, and Type of Credit. You should average 2 inquiries per year. Any more than that can have negative impacts on all three of these areas.
  • Making payments on bad, or old (more than 7 years), debt. This is a tricky one. The Credit Union would never teach you to not pay people that you owe. But, in an effort to teach you the impact on your score, paying old debt will have a negative impact. The important thing to look for here is the Last Reported Date for the item in question. The best example would be a collection item. You may have a collection item that is last reported last month, this would be considered current and active. But, the last reported date was 8 years ago and you make a payment (even paying it completely off), you are going to change the last reported date to a current date. If you refer to the Payment History section above, you will notice by bringing that date back to a current date you are making that debt more relative to your score than it was before you paid it (approximately 93% of the Payment History area).
  • Having loans at “second tier” finance companies. This will impact the Type of Credit and potentially the Length of Credit and New Credit areas. “Second tier” refers to places that some may call Payday Lenders or Subprime Lenders (companies that lend typically to low income and/or poor credit borrowers). A lot of these types of companies allow loans to be rolled over multiple times and each time the borrower rolls the loan it creates a new line of credit on the credit report (New Credit and Length of Credit). Also, if this is done prior to a minimum of 6 months of payment history then that particular line of credit on the report will have zero impact on the payment history area and therefore you will only see negative impacts to the score due to multiple new credit lines and the length of credit. It also impacts the Type of Credit due to the status of these companies being classified as subprime lenders.

So you are credit challenged … now what?

Most credit items take time to heal your score. Things we look at here at the Credit Union are:

Job Time

Residence History

Income vs Job Time

Higher Than Normal Unsecured Balances

Other Obligations Not on a Credit Report (For example, sending $1,000/month to child at school.)

Purpose of the Loan (frivolous bills, debt consolidation, etc…)

One simple way to build credit is using a Share-Secured Loan at the Credit Union. You don’t even need to have the money already in the account in order to borrow against it. We can use your paycheck to start it off and help build your credit and your savings. Here’s how:

  • Paycheck equals $1,000

  • Put the full $1,000 into a savings account and the Credit Union places a hold on the money

  • You are then given a loan for $1,000 against that savings account (so you still have your money in hand)

  • Pay on the loan for a minimum of 6 months (remember we want at least 6 months of history in order to count payment history on your score)

  • When the loan is paid off you will have $1,000 in your savings account

  • Next paycheck equals $1,000, put that in the savings account as well

  • You are then given a loan for $2,000 against that savings account, but this time you only need the $1,000 to replace the current paycheck for living expenses

  • And on and on and on…

This share-secured loan scenario impacts all the areas of your credit (except Capacity) in a positive manner and can slowly begin to help you heal your score.

If you still have questions, please talk with any of the staff at the Credit Union and we are more than happy to assist you and get you on the path to recovering your credit score.