Understanding Your Credit Score And How To Improve It.


Knowing what factors influence your credit score allows you to make positive changes to improve it.

Credit Score 101

Your credit score ranges from 300 to 850; the higher your score the better your credit.  Credit scores where devised by the Fair Isaac Corporation, also known as FICO, and are used by banks and other financial institutions to decide your level of risk with credit. In a nut shell, people earn high credit scores by maintaining a long history of paying their bills on time and keeping their debts low.

Lenders decide what kind of financial risk you present by using the following scale of credit scores with scores under 640 being known as ‘subprime.'

Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579

Your credit score is calculated from several different pieces of information in your credit report.  The data is grouped into 5 different categories that each have a different weight on your credit score.


1. Payment history (35%)

This is the big hitter in your credit score.  Paying your bills consistently on time is the largest factor in your credit score and is responsible for 35% of your score. Late bill payment will detrimentally affect your score the fastest, so scheduling your bills and making payments automated will ensure you don't miss a payment.

Best credit score tip: Pay your bills consistently and on time.

Read more: Understanding Your Credit Score [Infographic]

2. Debt ratio (30%)

Using less than 30% of your available credit is a great start in getting your credit under control and, if you can get your credit to debt ratio under 10%, then even better!

Here's an example. If you have a credit card with a $20,000 limit, keep the amount you use under 30% of that total, in this case, $6,600. If you can keep it under 10% ($2,000) of your credit limit then your credit score will be impacted even more favorably.

Best credit score tip: Keep your credit to debt ratio less than 30% (10% is even better).

3. Credit Age (15%)

Keeping your accounts open an in good standing over time is an indicator of being a lower financial risk. The longer your accounts have been open, and being used responsibly, reflects well on your credit report, and subsequently your credit score. Opening and closing credit cards is a bad idea, if you want to build a strong credit score. The length of your credit history impacts 15% on your score.

Best credit score tip: Keep your accounts open and in good standing for the long term. Refrain from opening unnecessary new accounts.

Read more: How To Build On Your Credit Score, The Right Way

4. Hard Inquiries (10%)

Just like opening and closing too many accounts, having too many hard inquiries on your credit report will have a detrimental effect.

It's important to know the difference between a hard inquiry and a soft inquiry on your credit report.  When you're applying for a loan or new line of credit, a bank or lender will perform a hard pull to determine what kind of financial risk you are regarding paying back the loan.   A hard inquiry can stay on your credit report for up to 2 years, but the effects on your score can wane over time.

A soft credit check might be done by an employer before hiring you.  These do not affect your credit score.

Best credit score tip: Keep hard inquiries to a minimum by only applying for new credit when absolutely necessary.

Read more: Establishing Or Reestablishing Your Credit

5. Credit mix/number of accounts (10%)

Credit mix refers to the varying types of credit accounts that you may have.  These can include credit cards, student loans, mortgages and auto loans. Lenders like to see that you have experience with different types of credit, BUT don't seek to increase the diversity of your credit mix with accounts you don't need.  This can adversely affect other parts of your credit score such as credit age, number of hard inquiries and number of accounts. Your credit mix makes up only 10% of your credit score.

Best credit score tip: Allow for a mix of credit types to evolve naturally during your life, don't seek out credit accounts that you don't need just for the sake of a varied credit report.

If you find yourself in too much debt and struggling to pay your bills each month, consider a credit counseling session with a certified credit counselor.  A counselor can help get you back on the path of financial health and a climbing credit score.  Contact one of our certified counselors on 1-800-992-4557 or learn more here.


Lori from Linked in

Lori Stratford is the Digital Media Manager at Navicore Solutions. She promotes the reach of Navicore's financial education to the public through social media and blog content.

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