Three simple digits. That’s all it takes to capture the quality of your credit history. It seems simplistic, but credit scores are an important tool that lenders use for virtually all loan and credit applications. Those three digits help lenders determine if they can trust you to repay a loan fully and on-time.
How credit scores are calculated
First, a clarification: You actually have many different credit scores generated by various credit bureaus and data analytics companies. However, the most common are FICO® score and VantageScore 3.0. Both of these scoring types use a range of 300 to 850, with 300 being considered “very poor” and 850 being “excellent.” A good credit score, 700 and up, puts you in a better position to get loans and credit cards with lower rates.
Here’s how different aspects of your credit history are considered when calculating your FICO score and VantageScore:
Payment history – 35%
Payments made on time raise your credit score, and late payments bring it down. Advancial can help you pay bills on time with our electronic Bill Payer service.
Credit utilization – 30%
Credit utilization measures the debt you owe compared to the total credit you have available. Reducing your debt can help keep your credit utilization low.
Length of credit history – 15%
Old accounts you consistently use can help improve your score. If most of your accounts skew toward being newer or you have accounts that you no longer use, your score may be docked.
New credit – 10%
When you apply for a new credit card or loan, a hard inquiry into your credit history can ding your credit score. Opening several accounts within a short period can also have a negative effect.
Types of credit – 10%
Managing multiple forms of credit (e.g., auto loans, student loans, credit cards) responsibly can boost your score. Lenders like to see a track record of repaying both revolving credit and installment accounts.
How credit scores are used
Your credit score might be pulled in a variety of circumstances:
• Loans and credit. When you apply to borrow money such as for an auto loan or a new credit card, the lender will look at your credit score to determine your eligibility and interest rate.
• Insurance. Insurers can pull a version of your credit score, known as an insurance score, to determine your auto insurance rate. Note that this practice is banned in some states.
• Renting. When you apply to rent an apartment or duplex, the landlord will check your credit score. This can influence whether you may need a co-signer or a larger security deposit.
Despite popular belief, employers and utility companies don’t access your credit score. However, they may be able to request a copy of your credit report.
Benefits of a good credit score
As we’ve touched on, having a good credit score can be extremely beneficial for reaching your financial goals. A high credit score can help you:
- Qualify for loans
- Get lower interest rates
- Need smaller down payments
- Score a lower insurance rate
- Be approved for higher credit limits
Strategies to improve your credit score
Improve your credit score and reap the benefits with these tips:
• Keep your credit utilization ratio below 30%. Accomplish this by fully paying off your credit card statements and charging less to credit.
• Avoid closing old accounts. Unless you’re accruing fees, it’s generally better to leave old accounts open as they improve your credit utilization ratio and your average account age.
• Don't open unnecessary new accounts. If you know you’ll need a high credit score to open a future account – like a mortgage – it’s wise to not open accounts that you don’t need.
• Settle all fines and tickets. An outstanding parking ticket or even library fines can reduce your score if a collection agency gets involved. Concentrate on saving money to pay off these debts and any additional fees.
• Correct any errors on your credit reports. Your credit score is based on the information included in your credit report, so it pays to review it for inaccuracies. Federal law entitles you to a free copy of your report once every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Simply go to annualcreditreport.com or call 877.322.8228.
• Make payments on a secured loan or secured credit card. These lending options are specifically designed to help people improve their credit. You borrow against your funds and slowly repay over time.
Learn more ways you can build credit.