Sense & Centsibility Blog
On a laptop screen., the words "Credit Score" are above a graph of range of scores. A person is writing in a notebook next to the laptop.
Credit
Credit Report

Credit scores: What you need to know

Tuesday, November 3, 2015 - 07:02

Credit is used in decisions regarding eligibility for loans, the cost of insurance premiums, and even employment and rental applications. A credit score is based on factors from your credit report at the time the score is requested. Generally better credit terms, such as interest rates, are offered to people with higher credit scores. The higher the score, the better the terms. So what's in a score, and what can you do to improve your credit score? We've got answers and tips for you.

What's in a credit score?

The FICO score was created by Fair Isaac Corporation, and it's the most common credit scoring system. FICO scores range from 300 to 850. The higher your score, the better.  An ideal score is at least 700. A lower score might result in paying more for the cost of credit and services, like insurance or loan interest rates.  So, it's important to know what your credit score is, what factors affect it, and how you can improve your score/maintain a good score.

Here's the breakdown on the factors that go into determining credit scores:

  • 35% of the score is based on Payment History -- whether or not you make minimum payments on time.
  • 30% is based on Debt Balances -- that is, the combined total debt owed on outstanding balance compared to credit limit.
  • 15% is based on Length of Time -- that is, when an account was opened and when it was last used.
  • 10% is based on New Credit -- the number of inquiries, time since credit inquiry, new credit opened.
  • 10% is based on Credit Type -- the mix of credit used, such as installment debt, revolving debt, and consumer finance accounts.

How to improve or maintain your credit score

  • Pay bills on time and/or before the due dates with at least minimum payments. Pay more when you can to decrease balances faster.
  • Keep your debt balances below 30% of the credit limits. For example, if you have a $1,000 credit limit, then keep the amount owed at $300 or less.
  • Apply for and open new credit accounts and services only as needed. Note: if you open or close a bunch of accounts in a short period of time, this can negatively affect your credit score.
  • Know what is being reported, and request your credit reports from Experian, Equifax, and TransUnion through AnnualCreditReport.com. You can order credit reports for free once a week, but expect to pay a small fee for each credit score requested. If you don't need your score, make sure you choose the right option to get your report only.
  • Check your credit report for errors, and make corrections to it. Also, make sure you remove outdated, negative information. If you have collection debt, read this post about how to pay collection debt to clean up your credit report.

Improving your credit score is not instantaneous. It takes time, but it can be done. If you would like a free credit report review, call LSS Financial Counseling at 888.577.2227. We're here to help!