Credit Explained

The higher your score, the easier it is for a lender to approve your credit and offer you their lowest rate. The lower your score, the more difficult it is to obtain credit and competitive terms.​

Here are the five primary factors that make up the ever-changing game of credit.

Payment History – 35% of your score

This is the history of your payments weighted to the most recent activity. You lose more points for recent negative payment history than for older negative history. Over time, older late payments have less of an impact as creditors pay more attention to what’s happening with your more recent payment history.

To maximize your credit score, pay each bill within 30 days of the due date.

Utilization Rate – 30% of your score

This is the percentage of available credit that you use based on your credit limit. You may earn points when you use less than 30% of your credit limit on revolving accounts, and you may lose points when you exceed 30% of your limit.

To maximize your credit score, know your credit balances and avoid exceeding 30% of your limit. If you consistently exceed 30%, call the card issuer and ask them to raise your limit. This will reduce your utilization rate.

Length of History – 15% of your score

This is the length of time your accounts are open. The overall age for your accounts goes up and down over time. Any time you open a new account, it reduces the overall age (and your score) until you build a history of making payments on the new debt. Closing an older account often negatively impacts your credit for the same reason. New accounts tend to subtract points for the first 12 months, are neutral for the next 12 months and add points after 24 months of on-time payments.​

To maximize your credit score, don’t close that old credit card account—even if you’ve achieved a zero balance—unless you’re being charged an annual fee. Your oldest accounts make the biggest impact on your credit score, so closing them could bring your score down. You’ll need to use the card at least every six months to keep it active and to ensure it’s adding valuable points to your credit score. Just don’t rack up any debt you can’t pay off the following month.

Type of Credit – 10% of your score

There are varying types of credit, including installment loans and revolving credit. It’s important to have both to achieve a high credit score. Too few accounts, or none that are currently active, will negatively affect your credit score. A good mix of credit types shows that you have the ability and willingness to manage your borrowing. Keep in mind that ATM and debit cards don’t really impact your credit score.

To maximize your credit score, have at least one major installment loan (mortgage), one additional installment loan (auto), and three revolving accounts (credit cards). If you’ve paid off your mortgage, open a home equity line of credit (HELOC) and use it for occasional expenses that you’ll pay off the following month.

Inquiries – 10% of your score

These are generally shown in two categories: soft and hard. A soft inquiry is when you pull your own credit report or an employer pulls your report with your permission. This has no direct impact on your credit score.

A hard inquiry is when a lender pulls your credit. This can have varying degrees of impact on your credit score. For example, if multiple lenders pull your credit report for a single new account (e.g., a mortgage), all of these inquiries are counted as one hard inquiry on your credit report. But if multiple lenders pull your credit report for multiple accounts (e.g., a Sears® card and an American Express® card), each instance counts as a hard inquiry, which can negatively impact your credit score.

To maximize your credit score, make sure you share your personal information only when necessary and/or you anticipate a borrowing transaction. Inquiries stay on your report for two years, and they only reduce your score for the first 12 months.

Monitor Your Credit

In general, 80% of all credit reports have one or more errors in them. All errors—even those that seem harmless such as the wrong address or multiple employers—need to be corrected. Take the following steps to review and monitor your credit report:

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1. Order your report by visiting annualcreditreport.com. Once each year you can obtain a free copy of your credit report from all three of the credit reporting agencies – Experian®, Equifax® and TransUnion®.

2. Review your report to make sure your personal and employment information, account statuses, credit limits and payment history are correct.

3. If you spot an error on your report, contact Equifax, Experian or TransUnion (based on where the error appears) to begin the dispute process. Note that this process varies by credit reporting agency, so contact the specific bureau for details.

   • • • Equifax: equifax.com

       • Experian: experian.com

       • TransUnion: transunion.com 

4. Once you get the errors corrected, keep a copy of any correspondence and review your old report against a new one to make sure old errors have not resurfaced on your report.

Credit Myths

Credit is a complex subject, and like most complex subjects, it’s often misunderstood. As a result, many people learn information about credit that simply isn’t true. Credit specialists at NCC are trained to help you navigate the myths and understand the truth about your credit.

• Paying off your collections will help your credit score

• Once you pay a collection, charge-off, judgment, or tax lien it no longer impacts your credit score

• Using your credit cards a lot will increase your payment history and raise your score

• Multiple credit inquiries pulled at one time in the same industry will not negatively impact your credit score

• Consumers have just 3 credit scores

• It is better if an account goes late occasionally than if it goes bad altogether

• Paying off your auto loan, student loan, or mortgage loan will help improve your situation

• Paying off your major credit cards and leaving the small store cards maxed is the better choice

• You should pay off one revolving account at a time

• Paying a large up-front credit repair fee will get you better service

• After 7 years, a negative item on your report will disappear and will no longer lower your score

• Having a third party, such as a consumer credit counseling firm, manage your finances will help improve your credit score more quickly

• For corrections, the burden of proof lies with the consumer

• “My divorce decree states that my spouse is responsible for that debt, so any future negative items will not impact my credit score”

• Your collection was sold, so the original one will be erased

• You need to contact your creditors rather than the bureaus every time you think there is a mistake on your credit report

• The credit bureaus, creditors and lenders are your friends!

• You have only 1 credit score

• A higher salary will improve your credit score

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