Your credit score (AKA FICO Score) is nothing more than a 3-digit number that measures how well you’ve managed your credit. The formula for the score was created about 50 years ago by the Fair Issac Corporation and now every credit bureau uses it to calculate your credit worthiness. Don’t confuse it with your credit report which is a listing of your debts and debt history. Credit scores range from a low of 300 to a high of 850. As of this writing, the middle to upper 600’s is considered a fair to average credit score.
Most every person knows the value of having a good credit score. The score reflects your creditworthiness. So a low credit score will make it more difficult for you to apply for and receive a loan. And a good credit score will make it easier.
But your credit rating is more than just a component of your financial life. Your credit score information touches your personal and professional life too. It’s become a large piece of your overall identity and it’s being used more and more in business to help make employment decisions. So your credit score is more important today than ever before.
But while most people understand the value of a top credit score, many do not understand the factors that affect it. Nor do they understand how to control those factors to improve their existing credit scores. I know I was pretty much ignorant of what affected my score until a few years ago – and I’ve worked in the financial sector for years. So let’s dive into some of those credit score factors and maybe clear up some misconceptions along the way.
What Affects Your Credit Score
Factors affecting your credit score are fairly easy to understand. They basically revolve around how you manage both your money and your available credit – and of course how long you’ve actually been doing it.
This is a big one. Not making your payments on time will drop your credit score. You aren’t penalized for the occasional missed date but if you’ve been late to the tune of 30, 60, or 90 days, then your credit score will definitely take a hit.
This number is compared to your income to provide a ratio of your debt. The smaller your debt is in comparison to your income, the better your score will be. So someone who owes 20% of what they make will have more of a negative impact on their credit score than someone who owes 10% of what they make.
Amount of Credit Used
If you have used most of your available credit, your score will take a hit. Banks and lending institutions like to see customers who haven’t maxed out their credit. They see that kind of behavior as responsible management and therefore it’s rewarded with a higher credit score.
The Age of Your Debt
The longer you’ve had a credit history, the better it is for your credit score. That length of time projects stability and a track record of handling debt. This is a key reason why young people just entering the workforce have generally lower credit scores – they simply haven’t had time to build a history.
How to Improve Your Credit Score
To improve your credit score generally takes both time and effort. There’s a certain discipline you must maintain. That means day-in and day-out you must manage your money and spending in a certain kind of way. Here’s what you must do.
Never Miss a Payment
If you have any revolving credit debt then you must arrange your payments to be on time. It’s an even better idea to arrange them so that they’re early. That way you’ll have some cushion space to guard against those times when there’s a hitch in the process like a long holiday weekend or a missed postman pickup.
Keeping a schedule of your payments and when they’re due (in the order that they’re due) can be a great help. You can write it down on a simple pad of paper or build yourself a spreadsheet; either way will work just fine. The key is to have something you can refer to on a weekly basis to make sure you haven’t missed something. That approach has worked very well in my household – we haven’t had a single late payment in years.
Reduce Your Total Debt
It sort of goes without saying (though I’m saying it here) that you should reduce any and all credit balances you owe as soon as possible. Reduce or stop using your credit cards completely if you can. Double up on credit card payments too, if you’re in a position to do so, to reduce your balances faster. Whatever it takes to lower that debt will help your credit score.