Credit Score Information: How To Manage Your Credit Score

A good credit score is essential to get the best interest rates on home loans, auto loans, and student loans. Sometimes, a bad credit score may disqualify you from certain jobs.

But what is a good credit score? Credit score information has become the basis of critical financial outcomes that affect us. But most people have no idea what factors positively or negatively affect their credit score.

This article covers common questions about your credit score and the credit scoring system. Learn more about the factors affecting your credit score, what your credit score means, and how to improve your score.

What Is a Credit Score?

Your credit score is a summary of your credit history that ranks your creditworthiness against the rest of the population. It's called a FICO score because Fair Isaac and Company developed the software that analyzes the numbers. Three major credit bureaus (Equifax, Experian, and TransUnion) watch credit use. They use the FICO credit score information and report it to lenders who ask about your creditworthiness.

Your credit history is on file with the credit bureaus. They have access to every loan you've taken and every credit card you've had. If it's financial and your Social Security number is attached, the credit bureaus know about it.

Credit Report vs. Credit Score

Your credit report offers a history of your credit activities. It includes accounts, payment history, and outstanding debts. It gives an overview of potential lenders. But your credit score is a numerical representation. It usually ranges from 300 to 850, derived from the information in your credit report. This single number gives a quick assessment of your creditworthiness. The higher the score, the better your financial health. The credit report and credit score play crucial roles in financial decisions.

What Factors Affect Credit Scores?

According to MyFICO.com, five factors get weighed most heavily in determining your credit score:

1. Payment history (35%)
2. Amounts owed on accounts (30%)
3. Length of credit history (15%)
4. New credit inquiries (10%)
5. Different types of credit available (10%)

Payment History

Payment history and current debt make up 65% of your credit score. Making on-time payments to your credit card company is important. Late payments can impact your score for up to seven years.

Amounts Owed

FICO considers the total owed and the proportion of debt to available credit. Keeping your debt below 20% of your credit can help maintain a positive score.

Remaining 1/3 of Your FICO Score

The remaining part of your credit score (1/3) is influenced by the length of your credit history, new credit inquiries, and the types of credit you hold. Lenders prefer a long history of responsible credit management. Most lenders are cautious about too many credit inquiries and appreciate diverse credit types.

Maintaining a Healthy Credit Mix

Creditors like to see a mix of credit types, including credit cards and loans. But responsibly managing loan amounts is essential to avoid negative impacts on your score.

What's a Good Credit Score?

FICO scores, ranging from 300 to 900, are crucial in assessing creditworthiness. While achieving a perfect score of 900 is rare, the median credit score in the United States is 723, according to FICO. Understanding the significance of different score ranges is essential:

• Excellent (Above Mid-700s): Scores above the mid-700s showcase strong credit health.
• Very good (720 and Above): A score above 720 is "very good," reflecting a commendable credit standing.
• Good (670-720): Scores between 670 and 720 are "good," indicating a solid credit profile.
• Below 650: Scores below 650 may raise concerns, leading to potential credit challenges.

The higher your credit score, the more likely you'll be able to secure the best interest rates. While a good score doesn't prevent you from getting credit, it may result in higher interest rates.

Credit scores also take into account your credit utilization ratio. A credit utilization ratio is the amount of revolving credit you're using divided by your credit limit.

How To Improve Your Score

Improving your credit score involves strategic steps that address key factors such as payment history and amounts owed:

• Automatic payments: Set up automatic payments for your credit card's minimum balance through your online bank account. This will ensure timely monthly payments without worrying about large debits.
• Balance management: Keep credit card balances low, ideally below 20% of your available credit. Aim to make more than the minimum payment to hurry debt repayment if not possible.
• Avoid closing credit cards: Closing credit card accounts can reduce available credit and increase the debt-to-credit ratio. Instead, make small monthly purchases on open credit cards and pay them off promptly to maintain a positive standing.
• Regular credit report checks: Periodically get copies of your credit report to promptly identify and rectify any mistakes. A mistake on your credit report can negatively impact your FICO score.

You can also consider credit counseling services to help build credit. A credit counselor can help get you on a debt management plan (DMP) to decrease your credit card debt. To learn more about improving your credit score, read FindLaw's article "How Long Does it Take to Improve Your Credit Score?"

Getting Your Credit Report for Free

By law, you get one free credit report each year from the three credit reporting agencies. You can get up to three free credit scores and reports each year. Go through your credit report carefully and dispute any information you feel is wrong. If you need more help, contact a consumer protection attorney.

To get a copy of your credit report, visit www.annualcreditreport.com, the site of the three credit bureaus. For more information on FICO scores, visit www.myfico.com.