By Paula Pant, WiserAdvisor contributor
Your credit score impacts a lot in your life, from buying a car to buying a house and even, sometimes, to getting a job. (Believe it or not, some employers check your credit report.)
You owe it to yourself to know exactly what your credit score is, and how you can go about making it better. Here's a quick rundown of the big things you need to know.
How Your Credit Score Is Calculated
The common FICO credit score model ranges from 300 up to 850. The higher your score, the better your credit is considered, and the easier it will be for you to qualify for loans (and get good interest rates on those loans).
Your score is based on five major factors:
- Payment history -- This is a measure of how good you are at paying your bills on time. This factor makes up a whopping 35 percent of your overall score, and if you've missed even one payment, it can hurt you.
- Amounts owed -- This is also known as your "debt utilization ratio." This amount, which is the second largest factor in your score, reflects how much of your credit limit(s) you're currently using up. Owing more than 20 percent of your total credit limit across all your accounts will harm your score. This factor accounts for 30 percent of your score.
- Length of credit history -- The longer your credit history, the better, as a long (positive) credit history demonstrates that you can be trusted to make regular timely payments. This accounts for 15 percent of your score.
- New credit -- Opening, or applying for, too many cards in the same period of time will reflect poorly on your score, as it indicates someone who's scrambling to drum up cash. This accounts for 10 percent of your score.
- Types of credit used -- Installment loans (fixed monthly payments like a mortgage or car loan) are seen in a more positive light than revolving loans (like credit cards), although having a mix is okay so long as the other factors above are in order. This accounts for 10 percent of your score.
Checking Your Credit Score
You're allowed to check your credit score for free once a year from the three major credit reporting agencies, TransUnion, Experian and Equifax.
The best way to structure this is to check one report every four months. For example, you might check Transunion in January, Experian in May and Equifax in September. The precise order of the three agencies doesn't matter. The bottom line is simply to make sure you're checking one report every four months to get the clearest handle on your score over time.
Note that TransUnion, Experian and Equifax only provide free credit reports through annualcreditreport.com, so beware of any other website offering you a credit report as it is not the "official" channel.
Note, however, that this website will only display your written credit report -- it won't show your actual numeric score. When you receive a credit report, you only receive a report of your credit history; the report won't contain a numerical score but will simply list your account activity. That's okay. You're just looking for factual errors.
If you want to view your number (your score) for free, try Credit Sesame and Credit Karma -- they don't give your FICO score, but they do give you scores from one of the three reporting agencies. They're completely free, unlike many other companies, which are free for 30 days, followed by monthly billing.
Boosting Your Credit Score
Okay, so you know your number -- now you'd like to improve it. Here's how:
- Fix any errors on your credit report immediately. Carefully read through your credit report each time you get it to make sure all of the information is accurate. If you notice any discrepancies, contact the credit reporting agency immediately to open a dispute.
- Pay your bills on time. If you have trouble remembering due dates, set up auto-payments to be deducted directly from your checking account.
- Pay any overdue bills immediately. If you're late on any accounts, make a payment as soon as you can. Credit agencies can tell how late your payments are, and the longer you take to pay, the more it hurts your score.
- Stop increasing your debt and start paying down your balances. Sure, it's the most obvious tip, but it's also the most powerful. Every other trick in the book won't boost your score as much as this one.
- Don't close old accounts. It may seem counterintuitive, but closing an old account you've paid off can actually hurt your score as it will no longer count towards your credit utilization ratio. If you've got old cards you haven't used in forever, charge something on them now and then (and pay it off immediately) to keep your credit history strong.
- Establish good credit. If you do it right (paying off the balance in full each month), opening a secured credit card, gas credit card or store credit card can help you establish good credit and boost your score. Again, this is only if you're able to totally pay off the balance each month, so never charge more on these cards than you'd be able to pay in cash.
- Ask for higher credit limits. This one is dangerous, so try it only if you are absolutely, 110 percent sure it won't tempt you to turn around and charge more to your accounts. The only reason you'd want to do this is to improve that debt utilization ratio we talked about, so keep your balance at the same amount (or lower) or the limit raise won't help.
In the end, what matters most is that you use credit responsibly, keep your debts low, pay your bills on time, and monitor your reports for any factual errors.
Those actions alone should be enough, but if you want to take it a step further, check your numeric score two or three times each year, and gauge it against consumer averages to see how well you're doing.
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