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How Credit Scores Work

By VerityCU October 26, 2020 Financial education

Your credit score is an important factor in mortgage qualification. It will determine if you are qualified and how much you will pay in interest to borrow money. Generally, a higher score will qualify you for a lower interest rate.  

Here's how your credit score is determined, with tips on improving each category. 

Payment History (35%) 

Ensure you are making all of your payments on time. If you have any recent late payments that are affecting your credit score, these have an "instant bounce back." You can recover most of your lost score by bringing these payments current.

Amounts Owed (30%)

High balances and maxed-out credit cards will lower your score. Keep account balances as low as possible. A good rule is below 25% of the credit limit, especially on revolving accounts such as credit cards and lines of credit.

Length of Credit History (15%)

In general, longer credit history will raise your score. After paying down or consolidating debt, be selective when closing your accounts. The longer the account is open, the better.

Mix of Credit (10%)

There are three categories of credit: revolving lines*, installment loans** and mortgages. Installment debt is preferred and scored higher than revolving debt. Therefore, paying off your credit cards or consolidating them into an installment loan (such as a personal loan) can increase your score.

New Credit (10%)

Each voluntary credit inquiry will reduce your score by about five points. Inquiries will remain on your report for 24 months, but will only affect your score for 12 months. Multiple inquiries for an auto loan, a student loan or a mortgage that occur within any 45-day window are treated as a single inquiry for scoring.

Get a Free Credit Report

Each year you can access your credit report for free (without your score) by visiting This free service allows you to review your report for any inaccurate or derogatory information.*** Some increases in your credit can happen within 30 days. Additional increases can take 3-6 months. You can also access your credit report (with your score) for a small cost by going directly to the three credit bureaus.


*These are accounts that have a pre-determined limit, like credit cards or lines of credit, where payments are based on a percentage of the balance. 
**These can be secured, like an auto loan, or unsecured, such as a personal loan, and are repaid in equal monthly payments (installments) including interest and a portion of principal. 
***Information on a person's credit report that can be legally used to turn down a loan application; it includes late payments, collections, charge-offs and bankruptcies.