It’s a very important number – but one most people don’t think about until it’s time to buy a house, refinance, make home improvements or pay for college. It’s your credit score, and it can determine whether or not you get that loan you want.
Lenders use credit scores to gauge how likely you are to pay your bills. Your credit score is based on the information in your credit report, which is a record of your credit payment history. That’s why it’s important to manage your credit responsibly over time.
Credit scores are also known as "FICO scores", named after Fair Isaac, who began his pioneering work with credit scoring in the late 1950s and designed the credit rating scale.
What Constitutes a Credit Score - There are five components that make up your credit score; 1) payment history 2) amounts owed 3) length of credit history 4) new credit and 5) types of credit used. Understanding and managing these components are critical to your current and future credit rating.
What You Can Do - Scores generally range from 350 to 850. The higher the score, the less risk you are, and the more likely it is that a lender will grant you a loan. If your score is on the low end, there are some things you can do to improve it.
Pay bills in full and on time: Your bill payment history is 35% of your credit score. And it takes into account any type of credit that has been extended to you by a lender, such as car loans, credit cards, mortgages, student loans, etc. Missing a payment or submitting the minimum due each month can lead to a lower score. The longer you pay your credit accounts on time, the better.
Carry small balances on multiple cards: Constituting 30% of your total score is what is known as your “credit utilization” level balance. This means how much of your available credit is being used. Using 50% or more of your total limit can be problematic. Pay down your debt to keep your utilization low. But don’t open a lot of new accounts just to increase your available credit. (We’ll tell you why later.)
Keep old cards open to establish a history: Your credit history makes up 15% of your score. The longer you can show you’ve been fiscally responsible and can maintain a low balance-to-limit ratio, the better off you are. Also, closing an account doesn’t make it go away; it still shows up on your report and may affect your score.
Avoid opening new accounts: 10% of a credit score is comprised of new accounts. Opening new lines of credit rapidly can make you look risky to a lender. Also, new accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information.
Carry an assortment of loans: The last 10% of your score is decided by diversification. Maintaining only one type of credit (i.e., credit cards) tends to make you look riskier than someone who has managed both credit cards and installment loans responsibly.
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