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WalletPrep worksheet · Credit

How do credit scores work?

Name ____________________ Date __________

Key ideas

  1. Payment history is 35% of a FICO score. Amounts owed is 30%, length of history 15%, new credit 10% and credit mix 10%. These are FICO's general weights.
  2. Utilization is balances divided by limits. Priya's $1,500 on $5,000 of limits is 30%. Paying down $800 cut it to $700 ÷ $5,000, or 14%.
  3. Checking your own credit does not hurt it. Looking at your own reports or score is a soft inquiry and does not lower your score.

Vocabulary

Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.
Credit bureau
A company that collects your credit history and sells reports to lenders. The three nationwide bureaus are Equifax, Experian and TransUnion.
Credit utilization
How much of your available credit card limit you are using, shown as a percentage. Lower utilization usually helps your score.
Soft inquiry
A credit check that does not affect your score, like checking your own credit or a lender sending you a preapproved offer.
Collections
When an unpaid debt is handed or sold to a debt collector after missed payments. It can hurt your credit score.

Work it out

Priya, 26, has two credit cards and $800 left from a tax refund. She wants to see what paying down her cards does to her utilization.

  1. Card A balance
  2. Card B balance
  3. Total balances
  4. Total limits ($2,000 + $3,000)
  5. Utilization now ($1,500 ÷ $5,000)
  6. Tax refund paid to card A
  7. New total balances
  8. Utilization after ($700 ÷ $5,000)

Check yourself

  1. Which factor carries the most weight in a FICO score?

    • A. Amounts owed
    • B. Credit mix
    • C. Payment history
    • D. New credit

  2. You owe $900 on cards with a total limit of $3,000. What is your utilization?

    • A. 30%
    • B. 9%
    • C. 33%
    • D. 300%

  3. Which of these is a soft inquiry that does not affect your score?

    • A. Applying for a car loan
    • B. Checking your own credit report
    • C. Applying for a new credit card

Your turn

Go to AnnualCreditReport.com and pull your report from one of the three bureaus. Check every account and every late payment. Then write down each card's balance and limit and work out your utilization, overall and card by card.

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Answer key

How do credit scores work?

Work it out

  1. Card A balance$1,200
  2. Card B balance$300
  3. Total balances= $1,500
  4. Total limits ($2,000 + $3,000)$5,000
  5. Utilization now ($1,500 ÷ $5,000)30%
  6. Tax refund paid to card A− $800
  7. New total balances= $700
  8. Utilization after ($700 ÷ $5,000)14%
  1. Priya's balances are $1,200 + $300 = $1,500 on $5,000 of limits. Utilization is $1,500 ÷ $5,000 = 30%.
  2. She puts the $800 on card A, which was at 60%. Card A drops to $400 ÷ $2,000 = 20%, and overall to $700 ÷ $5,000 = 14%.
  3. She pays a few days before card A's statement closing date, so the lower balance is what gets reported.

Check yourself

  1. C. Payment history Payment history is 35% of a FICO score in FICO's published weights, the largest of the five. Amounts owed is next at 30%.
  2. A. 30% $900 ÷ $3,000 = 0.30, or 30%. Divide total balances by total limits.
  3. B. Checking your own credit report Checking your own credit is always a soft inquiry. Applying for new credit usually creates a hard inquiry, a lender's check that can lower your score a little.