Published on

What is a Credit Score and How Do You Improve It?

Authors

What is a Credit Score and How Do You Improve It?

January 18, 2020 – Let’s face it: a good credit score can unlock opportunities – lower interest rates on loans, easier approval for rentals, and even better insurance premiums. But what exactly is a credit score, and more importantly, how can you improve it? This guide will break down everything you need to know.

What is a Credit Score?

A credit score is a three-digit number that summarizes your creditworthiness. It’s essentially a snapshot of your borrowing history, indicating how likely you are to repay debts as agreed. Lenders use it to assess the risk of lending you money.

The Big Three Credit Bureaus

There are three major credit bureaus that collect and report your credit information:

It’s important to check your reports with all three bureaus, as discrepancies can occur. You are entitled to a free copy of your credit report from each bureau annually through AnnualCreditReport.com.

How is a Credit Score Calculated?

While the exact formulas are proprietary, here’s a breakdown of the factors that contribute to your score:

  • Payment History (35%): This is the most important factor. Paying your bills on time, every time, is paramount. Late payments can significantly damage your score.
  • Amounts Owed (30%): This refers to the total amount of debt you owe and your credit utilization ratio (the amount of credit you are using compared to your total available credit). Keep your credit utilization low – ideally below 30%, and even better, below 10%.
  • Length of Credit History (15%): A longer credit history generally indicates a lower risk.
  • Credit Mix (10%): Having a variety of credit accounts (e.g., credit cards, loans) can positively impact your score, but it's not crucial.
  • New Credit (10%): Opening many new accounts in a short period can negatively impact your score, especially if you have a limited credit history.

How to Improve Your Credit Score:

Here's what you can do to boost your score:

  1. Pay Bills On Time, Every Time: Automate payments if necessary to avoid late payments.
  2. Lower Your Credit Utilization Ratio: Pay down your credit card balances.
  3. Don't Close Old Accounts: Keeping older accounts open (even if you don’t use them) can increase your available credit and positively impact your score.
  4. Correct Errors on Your Credit Reports: Dispute any inaccuracies you find.
  5. Become an Authorized User: If someone with a good credit history offers to add you as an authorized user on their account, it can help your score (make sure they have good habits though!).

Resources:

  • Credit Karma – Offers free credit monitoring and scores.
  • MyFICO - The source of FICO scores.

Improving your credit score takes time and consistent effort. By following these tips, you can build a stronger financial future.