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Have you checked your credit score lately (or ever)? Do you know how it’s calculated, or how to improve it? If not, no worries, you are not alone.

A credit score is a number based on your credit history that represents your ability to repay a loan. Lenders use credit scores to help determine how likely you are to repay a particular type of loan.

The most widely used credit scores are FICO scores, which are used by 90 percent of top lenders. These credit scores, created by Fair Isaac Corp., are calculated based solely on information from consumer credit reports maintained at the credit reporting agencies.1

The three main credit-reporting agencies (Equifax, TransUnion and Experian) all use FICO when calculating your credit score. And you have a score for each of the three, which is based on information the credit bureau keeps on file about you.1

FICO credit scores are rated as follows:2

  • Exceptional: 800-850 (About 20 percent of people)
  • Very Good: 740-799 (About 18 percent of people)
  • Good: 670-739 (About 22 percent of people)
  • Fair: 580-669 (About 20 percent of people)
  • Very Poor: 300-579 (About 17 percent of all people)

My challenge

If you’re thinking of buying a home, for instance, the difference between having a very good score and a very poor score could mean thousands of dollars in interest. A high credit score gives you more options as a borrower. This is true with any loan and means you typically have to earn more money, improve saving habits or rely more on cash to offset the repercussions of poor credit.3

So how can you improve your score? Glad you asked.

Challenge: After learning what your credit score is, give yourself a list of goals for how to improve it. Think of your values, and take the opportunity to further align your financial behaviors.

My solution

You may know that your financial behaviors (like paying bills on time) factor into your credit score, but do you know how much?

How your credit score is calculated4

  • Payment history: 35 percent
  • Payments owed: 30 percent
  • Length of credit history: 15 percent
  • New credit: 10 percent
  • Credit mix: 10 percent

Let’s break this down a bit, and tackle how you can improve your score going forward:

  • Payment history: This is the most important to lenders. Why? Because it demonstrates whether you’ve paid previous credit balances on time (and in full). Responsible (and timely) payment habits can help improve your score over time. Even if you’ve slipped up in the past, when looking at your history, a lender could notice recent positive trends.
    • Action to take: Make sure to get your payments in on time to demonstrate that you are a borrower of little risk.
  • Payments owed: Simply owing money to a lender doesn’t mean you’re a high-risk borrower. Many Americans have outstanding debts (think: mortgages and student loans). So, as long as your monthly installments are being paid on time and in full, owing may actually help your score.
    • Action to take: For smaller debts, like a credit card bill, make sure you pay on time and try to pay in full every month. For larger debts, like a mortgage, just make sure your monthly payment is made on time—debt is acceptable if it’s under control.
  • Length of credit history: Generally, the longer your credit history, the better positioned you are for increasing your score, especially if your behavior has been solid. But if many (or most) payments are late or inconsistent, it’s harder to improve your score. While you can’t change how far back your credit history goes, it can be comforting to know that most “bad” history drops off your report after seven years and “good” history drops off after 10 years.
    • Action to take: Simply put: Make payments on time. Also, be mindful of closing old accounts, even if you’ve paid them off or don’t use them anymore. This will limit the length of your credit history.
  • New credit: Lenders examine how many accounts you open in a certain amount of time. If you have opened several lines of credit in a short timeframe, this could be alarming to lenders as it demonstrates either financial trouble or a reliance on lots of credit.
    • Action to take: Be careful and thoughtful when considering a new line of credit. Don’t be in a hurry to have more cards.
  • Credit mix: Lenders want to see the range of your debt—from retail store accounts to mortgage loans. Having several lines of credit isn’t a problem. In fact, that can actually help your score by showing you are capable of juggling multiple responsibilities.
    • Action to take: Stay on top of your various accounts to boost your score. Don’t let some fall by the wayside.

The bottom line: Your credit score is dictated by your behavior, so make sure you’re setting yourself up for success. Get your score up by making payments on time, not borrowing more than you need and managing your finances. By being responsible and patient, your score will climb.

3 Key Takeaways
  1. A credit score is a number based on your credit history that indicates your ability to repay a loan.
  2. These factor into your score: Your payment history, payments owed, length of credit history, amount of new credit and your mix of credit.
  3. Positive financial behavior can help build your credit score over time, giving you more options as a borrower.




Challenge yourself

Be sure to maintain a solid credit score by sticking to healthy financial habits. Keep reading: Prepare before taking out student loans.

1 “Why are my FICO® Scores different for the 3 credit bureaus?” myFICO

2 “What is a Good Credit Score?” Experian

3 “What Will a Bad Credit Score Cost You on a Home?” Credit.com, April 2014

4 “What’s in my FICO Scores?” myFICO

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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