Your credit score is one of the most important numbers in your financial life. Lenders use it to decide whether to approve you for a loan or credit card and what interest rate to charge. Landlords, insurers and even some employers may also look at your credit. A higher score can save you thousands of dollars over time, so understanding how it works is well worth the effort.
The most widely used scores, FICO Scores, typically range from 300 to 850 and are calculated from the information in your credit reports. While the exact formulas are proprietary, FICO publishes the general weight of each category: payment history makes up about 35% of your score, amounts owed about 30%, length of credit history about 15%, new credit about 10% and credit mix about 10%.
Payment history and amounts owed
Payment history is the single biggest factor. Paying every bill on time, every time, is the most powerful thing you can do for your score. Late payments, collections and bankruptcies can lower your score significantly and stay on your report for years. Setting up automatic payments for at least the minimum due is a simple way to protect yourself from accidental late payments.
Amounts owed is largely about your credit utilization, the share of your available revolving credit that you're using. For example, a $2,000 balance on cards with a combined $10,000 limit is 20% utilization. Many experts recommend keeping utilization below 30%, and lower is generally better. Paying balances down, or paying before your statement closes, can help.
Length of credit history rewards experience, so keeping older accounts open can help, especially if they have no annual fee. New credit looks at how many accounts you've opened recently and how many hard inquiries you have. Applying for several new accounts in a short time can temporarily lower your score, so apply only for credit you truly need.
Credit mix considers whether you've successfully managed different types of credit, such as credit cards, auto loans, student loans and mortgages. It's a smaller factor, and it's never worth taking on debt just to improve your mix.
Check your reports regularly
You can get free credit reports from each of the three major credit bureaus, Equifax, Experian and TransUnion, through AnnualCreditReport.com. Review them for errors, such as accounts you don't recognize or payments wrongly marked late, and dispute any mistakes directly with the bureau. Correcting errors can sometimes raise your score quickly.
At Finance Zone Point, we help clients in Evanston and across the Chicago area understand their credit, build a plan to improve it and prepare for major borrowing decisions. Contact us for a free credit review.