Credit Score

The Ultimate Guide to Credit Scores

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The questions from readers keep pouring in and they almost all boil down to the same thing:

“How do I improve my credit scores?” or

“What effect will this action (short sale, credit counseling, etc.) have on my credit scores?”

They can both be tough questions to answer. After all, credit scores are calculated using lots of different factors and everyone’s report — and the scores that result — are individual. But there are also common misconceptions that, if dispelled, can stop someone from spinning their wheels, or worse, doing more damage.

A Very Good Place to Start

Start by getting your credit reports and scores. We can’t tell you how many people ask about improving their credit scores, but they have no idea where they stand now.  You need to get as much information as possible about two things:

  1. Where you stand now, and
  2. What main factors are influencing your scores.

Without this information, it’s pointless to speculate on what may or may not help, or what may or may not happen. Take advantage of any opportunity you have to gather information about your scores. For example, if you have been turned down for credit, or charged more for credit or insurance as the result of a credit score, you must be given a written disclosure that lists the main factors that contributed to your score along with information on how to order a free copy of your credit report from the reporting agency that supplied it for that decision. Read it and take advantage of it.

If you are offered a free credit report or score by your financial institution, or as the result of a data breach, take it. You can also get a free credit score from Credit.com that will explain the main factors influencing your score.

Breaking the Code

The next step will be to decode your credit scores. FICO scores and the forthcoming VantageScore 3.0 operate on a credit score range scale of 300-850. But more important than the number you get will be the main factors that are influencing your scores.

If you received your credit scores from multiple sources (a lender and a website offering credit scores, for example) the numbers you see will almost always be different from each other — even if you requested them on the same day. That’s because there are many different credit scoring models available. One score isn’t necessarily “wrong,” but in both cases you should focus on what areas are strong, and which ones need work.

The FICO Formula Is Just a Start

You’ve probably read that FICO breaks down credit scores into five main categories.  If any of these areas of your credit aren’t strong, you’ll have some work to do.

Your Payment History — 35% of your score

You know that paying your bills on time is good for your credit rating. But what if the damage is already done? You may be able to dilute your bad credit for a better credit score.  You can even start to rebuild your credit as soon as you have filed for bankruptcy, but be careful: there are a lot of myths about bankruptcy and credit scores and you’ll want to make sure you are getting good advice.

If your report lists debts that went into collections, understand that paying off collection accounts won’t likely help your FICO scores in the short term but it could prevent you from being sued for the debt. Do make sure that you aren’t being penalized by duplicate collection accounts.

How Much You Owe — 30% of your score

Here, one of the most important things most scores look at is how close you are to your credit limits. In industry terms, it’s called “credit utilization.” Keeping balances low on your credit score is usually helpful.

This factor can get confusing, though. For example, how the credit score will treat a home equity loan depends in part on which version of the scoring model is being used — and that’s not something you will know. And we’ve heard from readers who worry that having too much credit will hurt their scores, though in many cases that’s just not true.

By the way, paying off credit cards can have a positive impact, provided you don’t close all your accounts when your balances reach zero. Paying off a loan may not have the same impact, but can save you money in interest. Just be careful you don’t lose your credit score when you become debt-free.

Age of Credit History — 15% of your score

When it comes to building your credit, older accounts are generally better for your credit. If you have just started establishing credit, there aren’t any great shortcuts here, though some consumers have tried to use “piggybacking” to try to add older accounts to their reports. But once you have several credit references under your belt, one of the things you can do is to open new accounts sparingly, as that will bring down your average account age.

New Credit Inquiries — 10% of your score

Every time someone reviews your credit report, an inquiry will be created. Even though these make up a small part of the scoring formula, we find that many people worry a lot about credit inquiries. Their fears are often overblown, like the reader who complained that inquiries dropped his score by 104 points. On the other hand, this is a factor you usually have some control over. If you are working on building your credit, limiting the number of inquiries can be helpful. (Checking your own credit scores through a monitoring service does not hurt your scores, though.)

Types of Credit — 10% of your score

Consumers who score highest for this factor usually have a mix of different types of accounts, including installment loans like mortgages, student loans, or an auto loan; and revolving accounts like credit cards. The types of credit cards you carry may not matter as much, though it’s not a bad idea to have at least one major credit card in addition to a retail card.

What if an account you’ve paid on time is missing from your reports? If the lender doesn’t report accounts, then there probably isn’t much you can do, though it is worth taking a closer look to make sure that it’s not due to a mix-up. You can also check out the consumer reporting agency eCredable, which allows you to build credit using bills you already pay.

Finally, if your scores are already strong, then trying to aim for a perfect credit score can be a mistake. It may backfire. Aim high, but don’t obsess!

Credit.com’s Ultimate Guide series is designed to gather our most helpful stories on a particular topic. We encourage you to read the entire articles that we have referenced in this story. If you still have questions, feel free to post them as comments on the relevant story and we will do our best to respond.

Image: iStockphoto

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Art Zazzaro

    Apparently the “Data Snapshot” on How Much I Owe (30% of my score) shows that I owe $187,299 HOWEVER about $172,000 of that is a mortgage that I have along with another person (my fiance’) so therefore half of the mortgage is $86,000 plus $15,299 so therefore total debt should read about $101,299 and NOT $186,299. How can I reconcile this issue which is the only “F” in my score area (the rest are two A’s and two B’s)? If reconciled my credit score would probably go to around 780 or so. Please advise. Thanks, Art

    • Gerri Detweiler

      Hi Art –

      I assume you are talking about your Credit Report Card here? A few things I should clarify:

      1. “You wrote: Apparently the “Data Snapshot” on How Much I Owe (30% of my score) shows that I owe $187,299 HOWEVER about $172,000 of that is a mortgage that I have along with another person (my fiance’) so therefore half of the mortgage is $86,000 plus $15,299 so therefore total debt should read about $101,299 and NOT $186,299.”

      I assume you mean that you have a joint mortgage loan and you and your fiance have each agreed to pay half. (I don’t know of any other way a loan will be “split” but if I am missing something let me know.) If that’s the case, then the entire loan balance will be reported under both your names as you are both legally responsible to the lender for the entire balance.

      2. A mortgage loan, even for the entire amount you describe, should not earn you an “F” under this part of your credit score. The main factor the score is looking at here is your “utilization” or how close you are to your credit limits on your revolving accounts. Your mortgage is an installment account, not a revolving account.

      Do you have any credit cards? How do your reported balances on your credit cards or other revolving lines of credit compare to the total credit limits? You’ll learn more in this article: Credit 101: What Is Revolving Debt Utilization?

      Let us know if you still have questions about this part of your credit score.

  • Megan B

    How does an auto loan factor into you score? Does it just factor into Payment history via the monthly payments or does it go towards credit utilization…if so how?

    • beth

      An auto loan will only factor into payment history via monthly payments. It is my understanding that credit utilization is based on revolving accounts only – or how much credit you have available to use. An installment loan (auto loan) is a fixed amount that is paid in monthly increments. Once a few payments have been made, you do not have the ability to use the ‘credit’ (the difference between original loan amount and newly reduced balance) of the loan.

      • Credit.com

        Hi Beth — That’s right, installment loans like auto loans are not a factor in your credit utilization (also called “revolving utilization”). Your utilization percentage is based on revolving accounts only — which are always credit card accounts. In some cases it might include HELOCs too, but usually HELOCs are reported in a way that credit scoring models recognize that it’s a HELOC (home equity line of credit) and exclude it from the revolving utilization calculation. Hope this helps!

  • Andrew

    How often is credit utilization calculated?

    Over the course of a month I often will spend over 2 or 3 times my actual credit limit. However, I can pay my balance whenever I want online, so I often pay off my credit card every couple of days since it’s so easy. In this way I stay under my limit and am still able to earn points over my monthly limit. Is the utilization calculated on a daily basis, or cumulative over the month?

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  • http://google ja z

    What about authorized user accounts. I work for a lender and they believe authorized user accounts are mainly established to increase a credit/fico score so they look at it as the borrower’s debt even if it is removed or proven not to be that person’s debt. I established authorized user accounts for my children when they were in high school in the event of an emergency and then continued the use of these particular cards for college expenses for them. Has this harmed their credit now? The lender also looks at disputes as a sign of poor credit usage so sometimes denies a loan for this. How would you dispute fraud then? What do you ask the credit companies for if you wish to “dispute” an account then?

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  • Walden Gemmill

    One thing I have learned in the last12 years is that paying your monthly bills on time and having no debt, puts your FICO score in 625 or lower range. I have no debt, I have no credit cards, I understand that when you almost die from cancer, but live, because of our great medical doctors and are forced to take early retirement and live on nothing but Social security that it is difficult to get credit. I think it is totally unfair and wrong to make judgements about people who don’t have credit cards. No wonder this country is so messed up when ones life as to whether you are good or bad is based on whether you have a credit card and run up bills just so someone can make judgements about your life. Whether you pay your rent, phone, cable, etc, doesn’t seem to matter. All they care about is whether or not you have a credit card use it a lot and pay more in fees to the banks. What a mixed signal we must send to the world. IZ have not had a credit in12 years, lived on a fixed income, manage my money well and am glad to be totally debt free and not worry about what the credit reporting companies say, because most of their records are wrong and not up to date. Hopefully, some day employers will realize the inaccuracy of the information they are receiving. CREDIT CARDS ARE A BIG DOWNFALL TO THE USER.

    • David Lee

      Walden, while I do understand your frustration, if you never use credit, why do you need a good score? There are VERY few non-credit issues which would be affected by a credit score, good or bad. If you just WANT a good credit score, then you have to prove you can actually manage credit. It’s NOT going to be given to you out of the goodness of someone’s heart.

      Utility bills, rent, etc. have NEVER been part of the credit score system, at least for the vast majority of those type providers. The simple reason is because they AREN’T true “credit”. A fixed income is no excuse. Two bullets wrote an end to my 13+ year military career & put me in permanent DAV status many years ago. That means I’m on fixed income also. But I have 3 credit cards, 2 retail cards, 1 vehicle loan, & 1 home loan …. + a credit score of 775. All it takes is management, which you admit to being good at.

      Do you ever buy a vehicle? A new riding mower? New windows for your home? New bedroom suite? Those are often done by loans & will definitely up your credit, as long as you manage them right, which you claim you can do. If you’re lucky enough to be able to pay cash for every single thing you buy, why do you need a good credit score?

      You can get a high-interest unsecured CC with a 625 score. You can also get a decent secured card for $200. Charge $75 to each one, pay it off in 3 weeks. Do this for 3 months & watch what happens to your score. NOW you’ve got some “credit”. Shouldn’t be a problem, since you know how to manage money.

      This statement, “CREDIT CARDS ARE A BIG DOWNFALL TO THE USER” is ridicously ignorant coming from a person who confesses to both being able to manage money and NOT having a single CC for 12 years. How do you know? Did your cousin tell you that, or did you read it on the internet. Those 3 CC’s I mentioned earlier, + that 775 score, proves exactly opposite from someone who DOES have cards. Funny thing is, that score wasn’t difficult, because I DO know how to manage credit. It just took a while, since nobody gives it to you just for asking kindly.

      Lastly, blaming your country for your credit score … just wow! How many countries have you actually lived in …. not “visited”, but lived in? NOT including the U.S., that would be 3 here, Australia, South Korea, & Italy. They don’t just hand you over free money there either, trusting your handshake & good word.

      • Credit.com

        Mr. Lee — Thank you for taking the time to share your story. You said everything we believe and stand for, and you said it better than we ever could.

        • Rebecca

          Among the things that a credit score is used for are insurance rates, the ability to rent, whether or not some doctors will even see you as a patient. It’s all well and good to suggest someone should go out and get a secured credit card to prove they pay their bills on time. But what if you are disabled and are caring for a disabled child without the spare money? My homeowner’s insurance is twice what it would be if I had a higher score. I can’t lower it without credit card debt. Congress says this is legal in Illinois.

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  • WILMA

    I have checked our credit report, however the report is wrong, my son and husband have the same name, my son is a junior! my son lost his job and has a repossession under his ssn and name, we were not co-signers or have any legal obligation for this loan, I have check with the company the repossession belongs to and they have stated that is Juniors only, I have also called the county office where the repossession was legally tendered and they have also stated that is under my sons name! however when I disputed this with Equifax they have rejected my claim and continue to have the repossession listed under our name!

    • Credit.com

      Wilma – Hopefully when you filed the first dispute you did so in writing, through the mail. If not, it may be worth filing a dispute one more time and including a precise explanation and any copies of any documentation that may prove your dispute. Unfortunately, the online dispute process limits you to specific options and a limited character space. This resource may help:

      A Step-by-Step Guide to Disputing Credit Report Mistakes

      If the reporting agencies and collection company refuse to correct the error, your next line of defense is to contact the Consumer Financial Protection Bureau. And if that doesn’t get you anywhere, the your last step would be to contact a consumer law attorney. Under Federal law, your husband is entitled to an accurate credit report and if the account belongs to your son and not your husband, the credit reporting agencies and the collector are violating the Fair Credit Reporting Act. To find a consumer law attorney in your area, visit http://www.NACA.net.

      It’s tedious and time consuming, I know, but it’s well worth the time and effort to keep your son’s collection from tarnishing your husband’s credit file. Keep us posted and let us know how things turn out.

  • bibi

    I have an AMX card which I never use, it is a back up card. I was charged by AMX $39.00 for a wallet protection which I didn’t ask for it. I called to canceled it and they did canceled it. BUT…I called one or two days after the payment due day. AMX charged me $45.00 late fee for something I didn’t want or buy. I didn’t open the bill because I never use the AMX so I was sure there is no charge. I didn’t pay the late fee. After a month AMX charged me another late fee of $40 which again I didn’t open the bill. AMX reported a 60 day late fees and my credit score fall by 80 point. by luck I pulled my credit report 3 days after AMX had reported it and paid the $85.00. I was too upset to argue with them, and closed the credit card account with AMX.
    What can I do now to restore back my credit score? Should I dispute the report?
    After all I paid for late fees for something which I never bought or wanted and even called AMX to cancel.

  • http://Msn.com L Griffith

    Hi I recently completed payments on a auto loan, unfortunately this was a loan I had defaulted on, and was taken to court by the lender where we agreed on a new lower monthly rate. As I payed the loan the lender always reported negatively on my credit report paid on time or not. Is there anything I can do about these negative monthly credit reports ?

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  • http://www.Credit.com/ Gerri Detweiler

    Doris – I think this article might help you understand the effect of paying or settling a collection account on your scores: Will Settling A Collection Account Hurt My Credit Score?. And this one should help you understand steps to take to improve your scores: How to Improve Your Credit Score

    Let us know if you still have specific questions after reading those.

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