Credit scores may be one of the most critical aspects of your financial wellbeing. The difference between a good credit score and a bad credit score extends beyond getting accepted for loans and credit cards on favorable terms.
For example, insurers may consider your credit score when determining premiums for your coverage, or utility companies may use it to determine how much money you have to put down as a deposit.
Ultimately, credit scores impact your financial decisions. This article will provide actionable tips to maintain a good credit score and increase the scores for those who may not be in good standing.
What Is A Credit Score And How Is It Calculated
According to Equifax, one of the three major credit bureaus, a credit score is a three-digit number designed to represent the likelihood you will pay your bills on time. There are three major credit bureaus—Equifax, Experian and TransUnion. They each use similar data such as payment history, accounts owed, length of credit history and new credit to calculate your credit score. However, one bureau may include other factors such as income to generate a score.
The general credit score ranges from 300 and 850. Here is an example of credit score ranges:
| Standing | Range |
|---|---|
| Poor | 300-579 |
| Fair | 580-669 |
| Good | 670-739 |
| Very Good | 740-799 |
| Excellent | 800-850 |
Since each bureau calculates credit scores differently, the ranges may change slightly depending on their methodology. Although, that should only be a differential of a few points.
In addition to the major credit bureaus, there are two popular scoring services—VantageScore and FICO. Some services like Credit Karma use VantageScore 3.0, which pulls data from TransUnion and Equifax. Some credit card issuers or banks may offer access to your FICO score. For example, if you received a credit card from Bank of America, you can see your FICO score, which pulls TransUnion data. FICO scores may be one of the most important credit scores because it is used by 90% of the top lenders, according to their website.
Improve Your Credit Score By Paying Bills On Time
The easiest way to raise and maintain a quality credit score is to pay all your bills on time. Since the purpose of a credit score is to provide lenders an idea of how likely you are to pay them back, payment history accounts for 35% of your credit score. Some of the aspects included in payment history are:
- Payment information on credit cards, loans, mortgages and other accounts
- Amount of money still owed on delinquent accounts
- Number of past due items on a credit report
- Total number of accounts being paid
If you’re having trouble keeping track of your bills and making payments on time, try setting up automatic payments. By implementing this strategy, you will ensure payments will be made on time.
For AZCCU members, you can use the SavvyMoney tool to help you manage your credit. This resource offers users a free comprehensive credit report and allows you to access your credit score, personalized money-saving offers, financial education articles and so much more.
Although a few late payments won’t sink your credit score, late payments may stay on your credit report for up to seven years. Always know when bills are due, and if anything, make the minimum payment.
Maintain A Low Credit Utilization Rate
Accounts owed are slightly lower than payment history on the credit score totem pole. FICO has determined that 30% of your credit score is based on accounts owed. One of the most significant factors looked at in the accounts owed category is the credit utilization rate. This refers to how much credit you are using versus how much credit is available.
The credit utilization rate is calculated by taking your current credit card balance and dividing it by the card limit. For example, if you have a credit card limit of $10,000 and put $3,000 on your credit card, your credit utilization rate is 30%.
While most people can’t pay off their entire balance each month, financial experts consider keeping your credit utilization rate between 10% and 30%. Many experts argue that hovering around 10% will help increase your credit score and push you into that “excellent” range faster. The worst thing you can do is have a 0% utilization rate because that shows lenders and credit card issuers that you aren’t using your card to make purchases.
If you are struggling to maintain a utilization rate between 10% and 30%, you can request a limit increase. However, it’s critical not to raise the balance if the limit gets increased. Remember the point of increasing the limit to improve the utilization rate.
Build A Diverse Credit Profile
A diverse credit profile is commonly referred to as a credit mix. It accounts for 10% of your overall FICO score calculation. A credit mix provides lenders and creditors with a general idea of how you manage various accounts over time.
Here are different types of accounts you can add to you diversify your credit profile:
- Revolving accounts – credit cards, retail store cards and Home Equity Line of Credit
- Installment accounts – auto loan, student loan and mortgage
If you are looking to diversify your credit profile, we recommend starting with an inventory check of your existing accounts. For example, if you mainly have revolving accounts, consider including some installment accounts—and vice versa. However, you should never take on more debt if you cannot handle it. Only look to diversify your credit profile if you can shoulder the extra debt.
Since credit mix only accounts for 10% of the calculation, a weak credit profile won’t tank your credit score. If you are on the verge of “excellent” standing, diversifying your credit profile will give you that extra boost.
Keep Your Accounts Open
A long track record tells lenders and creditors a lot about your repayment tendencies. If you have a proven track record of making payments on time, the chances of you getting approved for a loan will increase. That’s why the length of credit history accounts for 15% of the FICO score calculation.
According to FICO, length of credit history refers to how long your credit accounts have been open, including your oldest account, the age of your newest account and the average age of all your accounts.
We recommend keeping accounts open for as long as possible. If you close a delinquent credit card, the balance will remain on your credit report until it’s paid off. Keep this account open and make small payments on time every month. Remember to occasionally use the card so the issuer won’t close it for you.
Expand Your Credit Profile With “New Credit”
New credit only accounts for 10%, but it’s another contributing factor toward credit score calculation.
Pursuing new credit should be treated carefully. As mentioned previously, you should never take on more debt than you can handle. Additionally, don’t open too many accounts too fast. Doing so will do more harm than good to your credit score.
New credit can improve your credit score if done correctly. Using this tactic in tandem with the credit mix strategy is a great way to boost your credit score fast.
Learn How To Expand Your Credit History From The Professionals
Credit scores can be confusing and, at times, may seem like your score is remaining stagnant. Your credit score is like Rome—it wasn’t built overnight. It will take time to get to your desired score. But now that you understand the main contributing factors that go into the calculation, you’ll be able to formulate a strategy to improve and potentially enter the “very good” or “excellent” range.
Arizona Central Credit Union offers a range of financial services. Whether you are in the market for a low-interest rate credit card, mortgage, student loan or have general financial-related inquiries, our financial experts can help. Contact us if you have questions or would like to open a bank account.
