The Science Behind a Good Credit Score

About the Episode

Welcome to the first episode of season three of Making It Count! In this episode, Cristina and Will dive into the world of credit with two special guests, Heidi Pauley, a Certified Credit Counselor and Financial Coach with Addition Financial, and Valerie Moses, a Making it Count alumna and Addition Financial employee. Listen along to find out what goes into calculating your credit score, how to get your credit report and ways to improve your credit score.

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Cristina asks Question 1: “Heidi, tell us a little bit more about who calculates credit score, like who is the man or woman behind the credit score curtain?”

Heidi responds: “We think of credit scores as just this number that randomly populates when we want to buy something. However, it’s actually a statistical model developed in 1989 by FICO, which stands for the Fair Isaac Corporation. This is the conventional model that is most often used and has been used for many years.”

“However, up and coming is the Vantage score, which was developed back in 2006. You’ll see that Credit Karma uses the Vantage score, as well as other lenders. I think this is interesting because it’s a more modernized way of getting your score. They both calculate the algorithms differently. So your number may look different from FICO than it actually does with Vantage. A fun fact is that the Vantage score was created by the three credit bureaus: Experian, TransUnion and Equifax.”

Learn more: The Credit Score Scale (300-800) Explained 



Will asks Question 2: “So, Heidi mentioned algorithms. Valerie, do we know what’s in those algorithms, or is it kind of like Google where they keep everything secret?”

Valerie responds: “Yeah, it’s a lot more transparent than your Instagram algorithm where none of us really know what’s showing up on our feeds. FICO is extremely transparent, and they even have the percentages of what factors into your score. They use five different criteria to determine the credit score. While we don’t know the exact calculations put into play, we do know what goes into it.”

“The five criteria are payment history (paying on time every time), credit utilization (how much credit is available to you and how much are you using), length of credit history, new credit and the mix of your credit (what types of credit you have). The first two are the most important. Thirty-five percent of your score is payment history, and 30% is credit utilization. The most impactful way to affect your credit score is to pay on time every time.”

“Vantage isn’t quite as transparent about what goes into it. A lot of the criteria are similar to FICO, but they do differ slightly, and the emphasis that they place is a little different. They don’t share exact percentages, but they’ll say that one factor might be highly influential versus one that might be moderately influential. Those criteria are your total credit usage, credit mix and experience, payment history, age of credit history and new accounts opened. They put more emphasis on a consumer’s credit mix and their experience than FICO does.”



Cristina asks Question 3: “Heidi, let’s start with the very top one that Valerie said. So 35% of our score is actually payment history, what does that mean?”

Heidi responds: “When we say payment history, this is 35% of your credit score by FICO. You always want to make sure your payment history shows that you’re making your payments on time every time, with no late payments. FICO views your payment history as an indicator of future behavior. If you go to apply for a loan and you’ve missed a payment, they’re going to look at that, and it’s how lenders look at how likely you are to repay them. It’s your creditworthiness, showing that you are able and willing in good faith to make those payments back.”

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Cristina asks a follow-up question: “So you’re saying that as long as I’m making the minimum payment every month, that will help me increase my credit score?”

Heidi responds: “Absolutely. When I’m coaching members through last year’s financial struggles, I always say the minimum payment is often as minimal as $25. Making that minimum payment can save you seven years of having to rebuild a missed payment.”



Will asks Question 4: “Valerie, what do you think our listeners should know about credit utilization? Why does it have such a big effect on credit scores?”

Valerie responds: “Your credit utilization is a measure of how much of your available credit is being used. It’s expressed as a percentage. For example, if you had $10,000 of available credit and $2,700 in debt, your credit utilization would be 27%. The thought is that if your credit utilization is too high, you may appear overextended, and lenders might be afraid to lend to you. You might not appear as though you could be able to pay back.”

Learn more: The Risks and Rewards of Credit Card Debt Consolidation 



Will asks a follow-up question: “So if I have four credit cards, are they looking at my total amount across those four, or is it per card?”

Valerie responds: “They are looking at the total amount across the different cards. If you’re using your credit responsibly and your cardholder reaches out to you and offers you a higher limit, take it. I always recommend taking that because you’ll have a higher amount available to you. If you’re spending the same amount, that credit utilization goes down, and it will help your score as well. But you definitely have to know yourself and your habits before accepting a higher credit limit.”

Learn more: When and How to Increase Your Credit Limit 



Cristina asks Question 5: “Heidi, let’s move to Vantage score. So, in the Vantage score, it calls for 'credit mix and experience,' what does that mean?

Heidi responds: “The beauty of credit mix is that it is just like us in Florida. We can’t have everybody be the same, that would be boring. We have to take into account everybody’s differences and uniqueness. They look at the credit score just the same. That mix consists of credit cards, unsecured debts, retail accounts, installment loans, and secured loans such as your mortgage or an auto loan. Vantage puts more weight on the credit mix than FICO does.”



Will asks a follow-up question: “Could you tell me if it’s true or not that having a store credit card will often have less of an impact on your credit score than if you had a credit card from a reputable financial institution?”

Heidi responds: “Store cards have a different weight than credit cards directly from Visa or Chase, any of those places. We often say if people are looking to consolidate or eliminate some debt, we would say that those are ok to close and pay off.”

“Another tip I wanted to share is that when it comes to the credit mix, it is not necessarily opening accounts just to have the perfect mix. If you want to do this, do it over a slow progression of time. Have your credit card. If you need an auto loan, get it. Or if you need another installment loan, that’s ok, but don’t do it all at once and don’t do it just to have a good credit mix.”

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Cristina also asks a follow-up question: “You were talking about secured and unsecured, but what does that mean?”

Heidi responds: “Anything attached to something tangible is a secured loan. Unsecured loans are riskier because the lender is at a loss. Here we heavily dive into looking at your credit score and your past credit history. Nothing is holding the loan secured like when you have an auto loan or your mortgage. If you don’t make your payment with those, we can take your house or car. Whereas with unsecured loans, they just go bad on your credit.”



Will asks Question 6: “So Heidi mentioned that you shouldn’t just open new lines of credit to get the perfect mix. But Valerie, how do new account inquiries affect credit scores?”

Valerie responds: “This probably has the least effect overall of the different factors that go in, but it can still have an effect. It just kind of depends on the type of credit inquiry you have going in. You could have a hard credit pull, which would be if you’re applying for a loan and they’re pulling the credit for that specific loan. Or you could have a soft credit pull. A great example of that is when you pull your own credit report that is not going toward any particular loan. You pull it for your information and to be aware of what’s on it. That is not going to affect your score. Those hard inquiries are what’s going to affect your credit.”

Learn more: First Credit Card Do's and Don'ts Checklist 



Cristina asks Question 7: “Heidi, what happens when I’m shopping around for a lender, like if I’m going to buy a house, but I want to get the best interest rate, does that affect my credit score?”

Heidi responds: “If you’re shopping around wisely, then there’s minimal impact. When you’re shopping around, you’re looking for the best rate to save money in the long run. For example, shopping for rates when you’re going to buy a car is ok to do. You just want to make sure that you get those inquiries within a fourteen-day period because the credit bureaus will know to lump those as one inquiry. So, you can go to three different dealerships, have fifteen inquiries for each, and the credit bureaus will know to just group it together as one inquiry. And the same goes for mortgage shopping as well, except you have thirty days for that. The best thing to do is to shop around for rates during that fourteen- or thirty-day period so that the inquiries get lumped together as one.”



Will asks Question 8: “So both Vantage and FICO measure the length of your credit history. Valerie, why does the length of your history matter?”

Valerie responds: “The length of your history matters because it helps you to establish a track record. If you can show that you’ve been paying your bills on time for several years and that you’ve been able to effectively manage different types of credit over a long period of time, it’s going to make lenders more likely to lend to you. You’ll appear as more of an attractive borrower. It’s like anything else. When you’re applying for a job, they like to see those years of experience, and it’s the same thing with credit.”



Cristina asks a follow-up question: “I’ve had a credit card since I was 18. If I were to close that card, would I lose all that history, and does that hurt my credit score?”

Valerie responds: “Great question. I say keeping that first credit card open forever is a great idea because it will impact your length of credit history. You lose that history if you close out that card. Keep it to put a tank of gas on it or buy gum. Just keep the card open, as long as it’s not costing you major annual fees.”


Cristina asks Question 9: “Heidi, we talked about all the different ways to use credit wisely, but how can I make sure that the credit report is correct? How often can I even look at my credit report?”

Heidi responds: “There are a couple different ways. The one I like is from because you get your actual credit report. Please make sure that you’re going to and not because that one is a scam. So, on, you can get your entire credit report for each of the three bureaus once every 12 months. I like that you get to see all the details, your payment history, cards closed, and open items. However, you don’t get a credit score when you do this.”

“There are also personal monitoring sites, such as SavvyMoney, Credit Karma and BankRate. You can use all of those. I like this as a personal tool because you’re the first to know if there’s any fraudulent activity happening on your account.”

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Will asks Question 10: “Last one, Valerie. Is there any way to predict what effect any one of these elements we’ve talked about could have on someone’s credit? For example, can you say that one late payment will result in a specific number of points being lost on your credit?”

Valerie responds: “Unfortunately, it’s not that easy. We don’t have the calculations. And even if we did, I was a communications major, so I would be the worst person to try to calculate that. However, we can say the factors we talked about today will have an effect. The longer your credit history is and the more positive behaviors you continue to show, such as paying on time, even if it's the minimum payment, is going to establish a positive track record for you. So, if you end up having a late payment, it won’t have a major negative effect on your score. It’s important to note that the longer you show these positive behaviors, the more it’s going to make a huge difference.”


Will asks Quick Question 1: “Heidi, what are some ways that people can build their credit history if they don’t have much credit?”

Heidi responds: “This one is fun! I love working with members that have little or poor credit history because they don’t know where to start, so I get to be the one to give them hope and guidance. You want to look at a secured card or maybe a credit builder loan. Or if your financial institution offers something to build your credit, that also works.”


Cristina asks Quick Question 2: “Alright, Valerie, this one's for you. How important is it to review your credit report for inaccuracies?”

Valerie responds: “This is so important, especially right now. We’re living in a time with a lot of fear, distraction and emotion. Whether there’s a pandemic or election happening, anything where there’s a lot of stress in a country, scammers will prey on that sense of distraction. It’s important to check your credit report to make sure the information is correct. If you’re a junior, or you have a very common name, you want to make sure your personal information is correct. And make sure that no loans or accounts are on there that you did not authorize or don’t belong to you. Check your report once a year from each credit bureau. I’d like to say every four months pull from one of them because you get that one per year. That really can make a difference, and you can spot fraud from a mile away when you do that.”

Learn more: What to Do if You Notice Unauthorized Transactions On Your Card 


Will asks Quick Question 3: “Have you ever had a credit mishap or misunderstanding?”

Heidi responds: “I’m gonna go deep on this one. As I’ve learned, it’s ok to share my story. And I wouldn’t be here, in this position, had I not gone through it. Of course, as life happens, you don’t ever intend on going through a separation. Through the process, I watched my credit score go from being fantastic to a 476. It brought me down to the deepest. I know what I went through and how I built myself up on my own are what led me here. I don’t want anybody to have to go through that by themselves, so that is why I love guiding others through it. There is hope, and you do recover.”


Cristina asks Quick Question 4: “What do you think is the best thing people can do to help improve their credit score?”

Valerie responds: “Always paying on time every time will really help that payment history. When you’re paying down debt, if you can make more than the minimum payment on one of those loans, it will help you move along because it can be really difficult. On your credit card statement, you can see the amount of time it would take you to pay off that bill if you only made the minimum payment. It can be daunting. If you can put a little bit extra toward one of those payments, it will go a long way.”


Will asks Quick Question 5: “Is it worthwhile for people to pursue a 'perfect' credit score?”

Heidi responds: “Everybody loves to be perfect. That 850 number. I can tell you when I pulled credit for members, and I saw that 850, it was a big celebration. I can also tell you that I can count on the number of my hands how many I’ve actually seen. It’s important to make sure you’re making your payments on time and have a good credit mix. A perfect score is not necessary. In reality, you want to make sure you’re getting the best rates. Of course, the higher the score, the better the rates are. So, that is what I say: A perfect score is not necessary.”

Learn more: Is It Worth Trying to Get a Perfect Credit Score?


Cristina asks Quick Question 6: “Valerie, you speak to college students all the time as a part of your job, and you talk to them all about money smarts. What is the most important thing you share with them where you can see the lightbulb go off?”

Valerie responds: “I think sharing the importance of building that credit score and understanding that your credit score is your reputation as a borrower. It can affect whether you get a job, especially if you want to work in the financial industry. It can affect whether you have to pay a security deposit on an apartment. It can affect your loans and so many things throughout your life. We’re lucky we don’t have people passing out credit cards in exchange for pizza and frisbees anymore, and thankfully, that is illegal. It can be very tempting to open up cards everywhere you go and have that freedom. It’s important college students understand the effect that it’s going to have on them as a borrower and encourage them to use it responsibly. Start off with paying for a tank of gas or something they know they’re going to pay off.”


In this episode, Cristina and Will shared two helpful resources to aid in your credit journey:

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