Financial Planning

Knowing What Goes into Your Credit Score

Understand what goes into determining your credit score and how to keep your score healthy. Your credit score will affect interest rates and determine financing options.

How to Know Your Credit Score

Your credit score is an important number. And, if you're like most people, you're keenly aware of how important it is to keep your credit score healthy. Your credit score directly impacts major financial decisions in your life because it often determines things such as interest rates and financing options. Unfortunately, for something so important, many people don't understand what goes into determining their credit score.

Should you know what goes into determining your credit score? In a word, yes! If you don't, it can be difficult to make good financial choices.

A low score can bust a budget

First of all, you need to think of your credit score as part of your family budget - because it is. For example, a healthy credit score can greatly affect what interest rates you'll pay on major purchases such as a vehicle or home loan, as well as increasing your eligibility for lines of credit when you need it. In the eyes of a lender, a high credit score demonstrates that you are a responsible borrower. Therefore, the higher your score is, the lower you interest rates will be. That can make a difference between an affordable car payment that easily fits in your budget, or one that has you struggling every month to come up with the cash. It may also mean that you can't afford to buy the car that you need. As harsh as it may sound, having a low credit score tells lenders that you're not the best credit risk for them to take.

Five factors that make up your score

The three major credit reporting agencies (also referred to as credit bureaus) are Experian, TransUnion, and Equifax. Your credit score is derived from a specific formula. Today, the most commonly used formula comes from the Fair Isaac Corporation, also known as FICO. While formulas can differ to a certain degree, they all consider the following five primary factors that are the foundation of your credit score. They are:

  • Your payment history.

    If you're late on making payments to lenders, here is where negative marks will appear.

  • Your debts.

    Are your credit cards maxed out? Using more than 50 percent of your credit line demonstrates that you rely heavily on your credit and may not manage your finances as well as you should.

  • The length of your credit history.

    Having little or no credit history can make it difficult to score you as a consumer. The longer you maintain current accounts with a good payment history, the more your score may improve.

  • Any new credit.

    While establishing your credit history is important, opening too many new accounts in a short period of time can work against you.

  • The types of credit that you use.

    Generally, having a mix of retail accounts, installment loans, mortgage loans, etc. is favorable to having just multiple retail accounts. While there isn't an ideal mix of accounts that you should have per se, good rule of thumb would be to only open credit accounts when you need them.

The importance of any one factor in this calculation depends on the overall information in your credit report - such as number of late pays, collections, a bankruptcy, a heavy debt to income ratio, and if you're just beginning to establish your credit. And, as the information in your credit report changes, so will the importance of any one of these factors in determining what your credit score is.

How to get your credit score

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report, at your request, once every 12 months. Your credit score is rolling snapshot that is constantly changing, the number revealed on these reports may differ from what a lender sees when pulling your report. However, they can be a good way to get somewhere in the ballpark when trying to get an idea of what your score may be.

For more information on what matters in your credit score, visit the Protective Learning Center.

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Understanding Your Credit Score

It is important to understand the factors used in determining how your credit score is calculated. This article provides an explanation of what affects your credit score so that you can better manage your budget and take control of your finances. It will also show you how to go about getting a free copy of your credit report so you can check the financial health of your credit score. For more information, visit the Protective Life Learning Center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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