Understanding and Improving Your Credit Score

Understanding and Improving Your Credit Score

Your credit score can either make or break your financial future. It’s important to understand how it works and how you can improve your score.


Good credit health gives you access to low-interest rates, easier loan approval and better loan terms. Having a good credit score and history can save you thousands of dollars in interest.

Poor credit health could prevent you from getting approved for loans, renting an apartment and even getting a job. An inadequate credit score will cost more in the long run and lessen your chances of getting quality financing.

How to Understand and Improve Your Credit Score

The system used to determine your credit score is sometimes complex and can be difficult to understand. Many people don’t even know where to begin. But your first step should be educating yourself. Learning the details of what affects your credit score and understanding what you can do to improve it, should be your top priority.

With a thorough understanding of how it all works, you can enhance your credit health and reap the rewards of having a strong credit score.

In this article, you’ll get a straightforward explanation of your credit score and what you can do to improve it:

  • What is a Credit Score?
  • Credit Reports and Credit Bureaus
  • How a Credit Score is Determined
  • The Factors that Affect Your Credit
  • What is Considered a Good Credit Score?
  • Tips to Improve Your Credit Score

What is a Credit Score?

Your credit score is the sum of all the information in your credit report transformed into 3 numbers. It’s an important metric that lenders use to assess your credit health.

An algorithm is used to determine a credit score based on information in your credit report. The information used includes payment history, open balances, credit utilization and more. Credit scores were created to measure the probability that you’ll satisfy your loan obligations.

One of the most common misunderstandings about credit scores is that you only have one score. In actuality, there are several different credit scores for each person. This is because different banks and lenders use different scores to evaluate your credit health. Your scores will differ from each other since every credit bureau and lender have their own processes.

Although there are many different scoring models, the one that’s most commonly used is the FICO credit score. Your FICO score is used by more than 90% of all major lenders in the United States. Another well-known scoring model is the credit score from VantageScore.

You won’t need to worry about monitoring every single credit score. You can just focus on your FICO credit score and the score you receive from VantageScore.

Even though each scoring model will slightly differ, they generally use the same key factors that affect your credit. Having a good understanding of how scoring models work makes it easier to start improving your credit score.

Credit Reports and Credit Bureaus

Credit reports are a compilation of data received by each credit bureau collected by lenders. There is a multitude of credit bureaus that provide credit reports, but the main credit bureaus to pay attention to are Experian, TransUnion and Equifax. These are the 3 main credit bureaus used by lenders, banks, creditors and businesses.

Experian, TransUnion and Equifax may have slightly different scores and reports for each person. Some lenders utilize just one of these bureaus while others may take all 3 into consideration.

Credit reports are continuously updated based on your credit behavior and the information you provide to banks, lenders, financial institutions and more.


The details and information in your credit report can be organized into four groups of data:

  • Public Records and Collections: information on any collections, liens, bankruptcies, wage garnishment and any derogatory accounts reported from collection agencies.
  • Credit History: how many open and closed accounts, the type of accounts, the age of the accounts and your credit utilization. The accounts can be any loan type, mortgage, credit card, auto loan, etc.
  • Payment History: the history of your payments and payment behavior including the number of late payments, how late and how often your paying on-time.
  • Credit Inquiries: Hard inquiries can impact your score and appear on your credit report after you voluntarily allow a lender to check your credit, like when you apply for a loan, credit card, mortgage, etc. Soft inquiries come from lenders and businesses that check your score involuntarily for credit offers etc. Soft inquiries will not impact your credit score.

In addition to the info listed above, your credit report will show your current and previous addresses, date of birth, name and social security number.

Credit reports will not have information regarding your employment status/history, your salary or bank account balances.

Most lenders will use additional data outside of what is on your credit report for credit decisioning. This can include things like income, assets and employment history.

You can request a free copy of your credit report from each of the 3 major credit bureaus, Experian, TransUnion and Equifax. It is your right to receive a free report once every 12 months. To get your free credit report, visit AnnualCreditReport.com, you can also call or mail them.

You do not need to contact the credit bureaus directly, its recommended to just use Annual Credit Report.

How Your Credit Score is Determined

Your credit score is determined from all of the information and data collected from credit bureaus. Every time you get a loan like an auto loan, mortgage or credit card, the lender keeps track of your credit behavior and sends it back to credit bureaus. The one exception is if the loan is not being reported to credit. (Which is rare when it’s a standard consumer loan.)

The information and data that lenders send to credit bureaus include account type, open balance, the amount due, account status (past due, on-time) and the amount paid.

Any time you apply for credit and the bank or lender pulls your credit report it is tracked and included in your credit history as a hard inquiry.

Your FICO and VantageScore will range from 300 to 850 and is calculated using the scoring agencies propriety system. There are 5 key factors that affect your credit score. They all play an important part in the scoring model and all come from your credit report.

5 Key Factors That Affect Your Credit Score 

Understanding and Improving Your Credit Score

1. Payment History

Your payment history is typically the most crucial factor when determining your credit score. Payment history tells lenders and financial institutions if you are capable of consistently making your payments and if you’re reliable enough to make them on time. It’s a key indication if you are likely to pay back any future debts.

This means even one late or missed payment can lower your score by a significant amount.

Several missed payments can snowball into a negative mark or derogatory account on your credit report. They will be grouped in with accounts in collections, judgments, bankruptcies and foreclosures. If you are less than 60 days delinquent and you rarely make late payments, it shouldn’t cause sustained harm to your credit score.

However, if you’re consistently making 30- to 60-day late payments, it tells lenders you’re likely to continue. Even worse is making a payment that is more than 90 days late. If you let an account go 90 days delinquent, credit scoring models like FICO will hammer your score.

Always pay your bills on time, every single time. Excellent payment history is key when improving or building your credit score. Having an organized budget will make it possible to put your payments on auto-pay and you won’t have to worry about them.

2. Amount Owed and Credit Utilization

Your credit utilization ratio assesses how much of your revolving credit is being used. It’s sometimes referred to as your debt-to-limit ratio. Revolving credit lines are mainly credit cards but can also be Home Equity Loans (HELOCs) and other loan types. Revolving just means the line of credit stays open and doesn’t close once it’s paid off like installment loans. Amount owed is another term for credit utilization as it’s simply how much you owe lenders.

Your credit utilization ratio is calculated by dividing the total amount owed on all of your credit cards/lines of credit by your total available credit limit.
Example: if you owe $7,000 and your credit limit is $10,000 your credit utilization ratio is 70%

Using more than 30% of your available credit tells lenders you are possibly overleveraged and it can harm your credit score. It’s best practice to never use more than 30% of your available credit. Paying down your debt or increasing your credit limit can help keep your credit utilization and amount owed low.

3. Credit Age and Established History

The age of your credit history plays a role in your credit score. Having a long-established credit history with a consistent record of on-time payments improves your credit score. FICO and other scoring agencies will look into how long all of your accounts have been open, how often you use them and the average age of all your accounts.

Closing a credit card account can have a negative impact on your credit score, especially if it’s your oldest account. You want to be careful not to shorten your credit age and established history. If you need to close some old accounts, your credit score can recover over time as your credit history matures again.

4. Number of Accounts and Account Type (Credit Mix)

Your credit mix is the mix of different credit accounts and how many of them you have. This means if you have a mortgage, a student loan, credit cards, auto loans, etc. they are all contributing to your credit mix. Typically having more open credit accounts that are in good standing will contribute to a better credit score. More accounts mean you are getting approved by more lenders.

Financial institutions and lenders want to see a diverse mix of credit accounts that include the two main credit types which are:

  • Revolving Credit: Credit cards, home equity lines of credit and other credit products. Your payment will typically fluctuate depending on how much credit you use.
  • Installment Loans: These are your standard loan products that will have a fixed rate and fixed payment amount, think auto loans, traditional mortgages, etc.

5. New Accounts and Hard Inquiries

Each time you apply for credit and a bank or lender requests your credit report, it is recorded on your credit file as a “Hard Inquiry”. Hard inquiries can stay on your credit report for up to two years and can sometimes be looked at as negative. Lenders interpret multiple hard inquiries as being desperate for credit and it appears that you are not getting approved.

On average one hard inquiry will drop your score by about 5-10 points. If you are shopping for a car and applying for multiple loans, you will have numerous hard inquiries, but these will most likely be reported as one inquiry.

When you check your credit report it will result in a soft inquiry that will not affect your score. Background checks from landlords and employers will also be a soft inquiry. Lenders will also submit a soft inquiry to provide you with a credit score or pre-approval offer.

Remember soft inquiries do not affect your credit score, but hard inquiries do by a few points.

What is Considered a Good Credit Score?

Businesses, lenders and financial institutions all have their own conditions on what is considered to be a good credit score. A good credit score doesn’t always guarantee you will get approved for loans or get the lowest rate. However, your chances of getting approved are much higher if your credit score is favorable.

Here is a breakdown of different scores based on the FICO scoring range of 300 to 850

  • Excellent: 781-850
  • Very Good: 720-780
  • Good/Average: 658-719
  • Poor: 601-657
  • Bad: 300-600

If you have a score of 720 and above, you’ll likely get easy credit approval and the lowest rates. A score that is below 720 but above 658 will qualify for traditional rates. If your score is below 601 you may have a hard time getting approved at all.

The average credit score in the United States is at an all-time high of 695 according to a 2019 report by Value Penguin. If your score isn’t great, don’t worry, there are ways you can start improving your credit score, keep reading!

Tips to Improve Your Credit Score

By now you should have a good understanding of how your credit health is determined, what’s included in your credit report and what factors affect your score. That knowledge will make it easier to begin improving or maintaining your credit score.

The process of improving your credit score is not something that will happen overnight. It takes time and some discipline to get a very good or excellent score. With that in mind, here are the top 5 tips to help improve your credit score:

1. Check Your Credit Report and Make Sure It’s Accurate

You can check your credit report for free every 12 months so make sure you do it. Go through each credit report from the 3 major credit bureaus: Experian, TransUnion and Equifax. Look for any mistakes (it happens) and dispute them directly through the credit bureaus. Your score is based on the information and data in your credit report, so it is crucial to make sure it’s accurate.

There are many free services available to check your FICO credit score on a quarterly basis. Check with your bank or financial institution to see if they offer it. You can also look into free products like CreditKarma. Check your score every quarter and if you notice a large drop, check your credit report to see what happened.

2. Never Miss a Payment

Do everything you can to make your payments on time every single time. Your payment history is the biggest factor that affects your credit score so it should be your main focus. If possible, enroll in automatic payments for everything, utilities, bills, cell phone, credit cards, etc.

3. Track Your Credit Utilization

Monitor and track your credit utilization ratio and aim to always keep it under 30%. If you can, pay more than your minimum payment. If you can pay off your credit card balance in full each month, you’ll avoid paying interest and keep your credit utilization low.

You can request a credit limit increase to help improve the available credit metric on your credit file. Just be sure not to increase your unnecessary spending.

Another option is to refinance credit cards and high-interest loans into a HELOC or loan with a low-interest rate. This will help you pay less interest, lower your credit utilization and make it easier/quicker to pay off debt.

4. Build Your Credit Age and Limit New Debt

Try not to apply for unnecessary credit cards or loans. Think long and hard about big-ticket purchases and how they can affect your credit. If you don’t have any credit then you will need to apply for a loan and start establishing a credit history.

A great choice for those looking to build or rebuild their credit is a secured credit card. A secured card will hold your cash as collateral, but it still reports to credit allowing you to start building or improving your credit history.

Only close old credit accounts if you have a very good reason. Closing an old account can be a double whammy to your credit because it can harm your credit age and credit utilization ratio.

5. Pinpoint What You Need to Improve and Make a Plan

Once you know your credit report is accurate you can easily identify the problem areas. If you have collections, work on getting those removed as soon as possible, same with any liens or judgments. If you have late payments, start paying them on time, you can even try contacting the lender to see if they’ll remove it. (This is a case by case basis and isn’t very likely to happen for most people.)

Set some goals and create an action plan to start improving your credit score. There is no “quick fix” strategy, you will need to be patient and keep at it. Don’t over complicate things. Pay down your debt and pay it on time.