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Deconstructing the Credit Score

The Credit Score is one of the few greatest mysteries in the credit card world. This three digit number can mean many things to banks and lenders, but say very little to us. What exactly is a credit score and how does it affect you? Why does your score fluctuate so much and how can you improve it?

There are many scoring types out there, and no two are created equal. Comparing one to another usually doesn't make much sense. Some take in to account certain things while others leave these things out. Sounds pretty ambiguous, doesn't it? Unfortunately, that is the nature of the Credit Score. These specific details are unknown to us consumers, but with a better understanding of the knowledge that is available to the public, we can get a better idea of what this mysterious three digit number means and how to can keep it in a good range.

The Breakdown

Your Credit Score is comprised of 5 main categories:

  1. Payment history (35%) - The history of your ability to make payments on-time and in full.

  2. Amounts owed (30%) - The amount that you owe compared to the amount of credit extended to you, also understood as your utilization.

  3. Length of credit (15%) - How long you have been using credit responsibly. The longer that you can demonstrate responsible use of credit, the better.

  4. Credit mix (10%) - The amount of revolving credit and installment accounts open.

  5. New credit (10%) - The amount of new credit lines or loans opened recently.

These categories affect your score in a different capacity, and their weighted percentages are shown next to each one. What these five categories demonstrate is how competent you are at using lines of credit and paying back the money you owe as agreed while giving insight to what your current financial health might be like to lenders. Having a high utilization, late payments, and opening multiple new accounts can be a red flag to lenders as you may appear to not have the funds and need more credit to pay off your debts. Keeping your utilization low, paying on-time, and opening new accounts at least multiple months apart shows issuers and lenders that you are responsible and unlikely to default on your debts.

Often times you will see scores described as "poor," "good," "fair," or "excellent." The cutoffs for each category vary between issuers. Most issuers follow the same range of 500-850, although some could even go up to 900. Each of these are relative to themselves and not each other, so do not be discouraged.

Why are my Scores so Different?

In the United States there are three main companies that produce credit scores based on the criteria above: Equifax, Experian, and TransUnion. If you are able to see your score through a mobile banking app or on your single annual free report, you will notice that these numbers are rarely all the same. Do not worry, this is to be expected. They are all different companies that take in to account different aspects of our financial habits in different ways. Some institutions have their own scoring system. Chase Bank has their own proprietary scoring system that is unique to them in evaluating a consumer's score, and is speculated to take in to account an individual's 5/24 status. We will never know all of the exact categories and how each one specifically affects our score, but do not be surprised if they vary from each other from time-to-time.

Why does my Score Change so Often?

Your score is a dynamic value that will fluctuate over time. Sometimes our scores will go down unexplainably. As frustrating as this can be, it is important to not let this affect our mental well-being. Fluctuations of 1, 2, 7, or even 30 or 50 points can be seen sometimes. When this happens, make sure you did not miss any payments, or verify that you didn't do anything that would result in an impact to your score (like requesting a credit limit increase, for example) without your knowledge. Once you verify that this change is not due to an accidental derogatory mark, just maintain healthy financial and credit habits to help recover your score.

By keeping your utilization low, paying on time, and not opening many accounts within a short amount of time, you should begin to recover those points to your score. Some months your utilization may be high, but do not worry, your score is calculated on a monthly basis and is averaged out over time. Make sure that you lower your utilization during the next billing cycles to help recover those points.

If you did miss a payment by accident, make the full payment immediately and try calling the issuer and explaining the situation. Sometimes they can be forgiving the first time, but they will not be so lenient to repeat offenders. Keep in mind that derogatory marks will stay on your report for multiple years. New inquiries, such as opening a new credit card, will typically last on your report for 2 years before falling off. Not making payments will typically stay on your report for 7 years, which is why you should always make sure to make your payments on-time and in full!

How can I Raise my Score?

As mentioned above multiple times (can't you tell this is really important?) the best way to maintain a good score is to make your payments on-time and in full. The longer that you can demonstrate you can do this competently, the better you will appear to banks and lenders. Unfortunately there is no reliable and fast way to increase your score by hundreds of points instantly. If there was, everyone's scores would be amazing. Your Credit Score is like a snowball that is rolling down a hill. The longer your history of on-time payments, the bigger the "snowball" and the less likely it will be affected by obstacles or the sun (or inquiries and derogatory marks).

If you are new to the credit card world and have only received a credit score within the last few years, you are more likely to see a bigger impact to your score when getting hard pulls or opening new cards. More experienced credit card users have a bunch of solid history cushioning the impact of new hard pulls and derogatory marks. That is why is it important to establish healthy financial habits early.

Preparing for the Future

A good credit score is often needed for mortgages or car loans. Not only can your score affect your eligibility for these loans or other lines of credit, but it can affect the interest rates as well. Banks will want to minimize their risk of losses and might charge a higher interest rate with their loan to cut back on their losses. This is again why it is important to always pay on-time and in full and maintain healthy financial habits as it could end up saving more money in the future!

The Credit Score is truly one of life's greatest mysteries, and although we will never know exactly what affects each type of score that exists out there, we can do our best to maintain our score with the information we have while also being aware that it is a number that will fluctuate over time. Many experts have tried to decode its meanings, but it never defines self-worth. If your score is considered low, do your best to maintain good financial health, keep your utilization low, and make your payments on-time and in full.


TransUnion, Equifax, and Experian are properties of their own companies. Chase and its proprietary score are properties of J.P. Morgan Chase. This article is not financial advice and use of any of these companies' properties are for educational purposes only. Please check each institution's websites for more information.


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