You know your credit score is important. You probably even know what yours is. But do you know what it means? In the most basic terms, a credit score is a number, assigned by a credit reporting company, that reflects your level of creditworthiness. The higher your score, the better your credit. It’s a simple indicator to lenders you are likely, or unlikely, to repay loans on time. Credit scores are determined by three nationwide reporting companies — Equifax, Experian and TransUnion — that evaluate your credit report, a detailed history of your credit used to paint a picture of your financial history. FICO scores, the standard credit score in the U.S., range from 300, representing very high-risk or bad credit, to 850, very low-risk or good credit. Factors including race, religion, sex, martial status, salary, occupation and employment history aren’t included in calculating a credit score. Your FICO score may vary among the three major credit bureaus, based on the information each uses to calculate your creditworthiness. It includes:
- Bill payment history
- How many accounts you have open and how often you use them
- The amount of available credit you use
- Total debt
- Recently opened accounts and credit inquires in your file
- Available credit
According to the Consumer Financial Protection Bureau, the score a consumer sees could be different from the score a lender purchases to determine creditworthiness. The scores could have been determined using a different model, for example, or the credit report used for one score could have differed from the report used to calculate the other.
Improving your score
Things that negatively impact your credit score (including missed payments, closing an account and bankruptcy) lower your score. Other actions can raise a poor score or sustain a high one, including:
- Paying all your bills on time.
- Maintaining a mix of accounts — including credit cards, car payments and a mortgage — over time to improve your score.
- Keeping revolving balances under 30 percent of your credit limits
- Reducing your debt.
- Not opening too many accounts within a short timeframe.
- Opening only the amount of credit you need.
While raising a bad credit score could take time, there are things you can do now to set yourself up for success: Know what’s out there. Request a free copy of your credit report online, and check for mistakes. Look for erroneous late payments, and check to see if what you owe on any given account is correct. If you do find a mistake, dispute it with the credit bureau and reporting agency. Automate your payments. Paying your bills, and paying them on time, is one of the biggest determining factors of your credit score. Set calendar reminders or check if your bank has a payment reminder system. Automatic payments can also ensure a bill doesn’t slip past your radar. Pay off small balances. Your score takes into account how many accounts or credit cards have a balance, even a small one. Knock out small balances and choose one to two credits cards (preferably with the lowest interest rate) for your regular spending. Shrink your debt. This one will take time, but make whittling down the amount you owe a priority. Structure your payments so the highest amount you pay is to credit cards with the highest interest, and be sure to maintain at least minimum payments on your other accounts.
