Here’s exactly how your credit score is calculated
Improving your credit score may be intimidating, but it doesn't have to be
- Your credit score is comprised of key factors like payment history, credit utilization, and more.
- Always check your score details, as inaccuracies may be negatively affecting your score.
- Improve your score by putting lowering your utilization and waiting for the right time to apply for a new card.
To some, a credit score is just a number. In reality, credit scores can affect your personal finance journey in many ways. Your credit score can determine whether you’re approved for a loan, the interest rates you receive on loans, and even how much you’re charged for your bills.
With so much riding on a good credit score, it’s important to know your score and ways to improve it. Yet, how is your credit score determined? Here’s what we know.
Key factors affecting your score
The first step in understanding how your credit score is determined is knowing what factors to look out for. Generally speaking, your credit score is determined by your payment history, credit utilization, length of your credit history, and hard credit inquiries.
All of these items come in to play when determining where your credit score lies between 350 and 850. The higher the number, the better the score.
Most importantly, poor payment history lowers your credit score the most. When it comes to credit utilization, it’s advised to keep your credit card balance under 30% of your total credit limit.
Your credit history isn’t something that can be easily changed, as this is determined as the average age of all your credit accounts. However, you can always sign up for a simple credit card like a gas card and use it sparingly to establish credit age.
Hard credit inquiries – like when you apply for a new credit card, car loan, or apartment – also affect your score. Your score will lower if you have too many of these over a short period of time, but hard inquiries tend to go away after one to two years.
How to improve your score
So, you’ve discovered your credit score and you aren’t too thrilled with what you see. Luckily, there are easy ways to improve your score.
First, always check your credit report history to make sure all the information on the report is correct. In many cases, people will have credit cards or loans listed on their credit reports that aren’t their own. If you find something incorrect, you can file a dispute to remove the item from your report.
Within a few weeks, your score should be adjusted to properly reflect the correct items on your report.
First, always check your credit report history to make sure all the information on the report is correct. In many cases, people will have credit cards or loans listed on their credit reports that aren’t their own.
You can also improve your score by always paying bills on time, reducing your credit utilization to under 10%, and only applying for a credit card when you absolutely need it. Applying for too many lines of credit at once will create several hard inquiries on your report, lowering your score and your chances of receiving that new card.
After you’ve made these moves, you should see your credit score climb over time. Be patient, as this process takes time.
A deeper dive — Related reading from the 101:
- How consolidating credit card debt affects your credit score | Finance 101
Debt consolidation is tempting, but make sure it’s the right move for your score
- The truth behind free credit scores: Are they accurate? | Finance 101
Plenty of sites offer free credit score monitoring. But do they work?
- When it comes to your credit score, good enough is good enough | Finance 101
If you’ve made moves to improve your score, don’t stress over just a few points