Your credit score is like your financial report card, except this one follows you around for years and affects everything from your mortgage rate to whether you can rent an apartment. Yet most people don’t really understand how credit scores work or what they can do to improve theirs. Let’s fix that.
First, let’s break down what goes into your FICO score, which is the most commonly used scoring model. Your payment history makes up 35% of your score. This is the big one. It tracks whether you pay your bills on time, every time. One late payment can stay on your credit report for seven years, though its impact lessens over time. If you’ve made mistakes in the past, don’t panic. Focus on making every payment on time going forward. Consistency is what rebuilds trust.
Credit utilization accounts for 30% of your score. This is the ratio of how much credit you’re using compared to how much you have available. If you have a $10,000 credit limit and you’re carrying a $3,000 balance, your utilization is 30%. Experts recommend keeping this below 30%, and ideally below 10% for the best scores. This is actually one of the fastest ways to boost your credit – pay down your balances and watch your score climb within a month or two.
The length of your credit history makes up 15% of your score. This one is frustrating because there’s no quick fix – you just need time. The average age of all your accounts matters, which is why closing old credit cards can actually hurt your score, even if you’re not using them. Keep those old accounts open, especially if they don’t have annual fees. They’re helping your score just by existing.
New credit inquiries account for 10% of your score. Every time you apply for new credit, a hard inquiry appears on your report and can temporarily lower your score by a few points. This makes sense from a lender’s perspective – if you’re applying for lots of credit at once, you might be in financial trouble. Space out your credit applications and only apply when you really need to.
Credit mix makes up the final 10%. Lenders like to see that you can handle different types of credit responsibly – credit cards, installment loans, mortgages, and so on. Don’t go out and get loans you don’t need just to improve this category. It’s the smallest factor, and your score will improve naturally as you go through life and take on different types of credit.
Now let’s talk about some common credit score myths. Checking your own credit score does not hurt it. This is called a soft inquiry and has no impact. You should check your score regularly – many credit cards now offer free score monitoring, and you’re entitled to free credit reports from all three bureaus once a year at AnnualCreditReport.com.
Another myth? You need to carry a balance on your credit cards to build credit. This is completely false and actually costs you money in interest. Pay your cards off in full every month. You’ll build credit just as well and keep more money in your pocket.
If your credit score needs work, start with the basics. Pay every bill on time. Set up autopay if you struggle to remember due dates. Pay down your credit card balances to improve your utilization. Dispute any errors you find on your credit reports – mistakes happen more often than you’d think.
For people with no credit history or very damaged credit, secured credit cards can be a good starting point. You put down a deposit (usually $200 to $500), and that becomes your credit limit. Use the card responsibly, pay it off every month, and over time you can graduate to a regular unsecured card.
Improving your credit score takes time, but it’s one of the most valuable financial projects you can undertake. A good credit score can save you tens of thousands of dollars over your lifetime through lower interest rates on mortgages, car loans, and insurance. It’s worth the effort.
