Get More from Your Credit Score

Financial PlanningPosted on March 8th, 2018No Comments

Written By: Ryan Rasmussen

Credit scores are used by individuals and organizations as a method of assessing a person’s financial responsibility. The “grading scale” ranges from 300, being the weakest, to 850, being the strongest. As a reference, Experian assesses a credit score above 670 as “good”. It is widely understood that this three-digit score helps lenders decide whether or not to approve someone for credit cards and loans, but the significance of this number permeates much further than that. As such, it is important to understand how your credit score is comprised, especially if you are trying to increase your score.

So, what exactly makes up your credit score? Data from your credit report is organized into five categories; each category making up a different portion of your credit score. Furthermore, each category carries a different “weight” in the composition of your score, so categories that make up a larger portion of the score have a more significant impact on your overall number.

Composition of Your Credit Score

The following is a break down of the composition of your credit score.

Payment History (35%): Your payment history is the heaviest weighted factor that determines your credit score. Thus, making on-time payments will benefit your credit standing forever. As you may assume, then, having a negative payment history will have the opposite effect on your credit score. Some aspects of a negative payment history, such as accounts sent to collections, tax liens and bankruptcy, will fall off your record in seven to ten years.

Credit Utilization (30%): Your credit utilization is the ratio of your credit balances to credit limit. This is a measurement of your credit limit that is being used. The lower the percentage the more positive the impact on your score.

Length of Credit History (15%): Your length of credit history is determined by averaging the amount of time all of your accounts have been open. It has been found that generally speaking, there is a positive correlation between the age of an account and a higher credit score.

Types of Credit Used (10%): There are three categories of credit accounts: revolving, installment, and open.

  • A Revolving Account is a line of credit that is based on the amount of credit a person has, with the maximum credit limit set by the lending company. The payments for revolving accounts are variable. (Example: Credit Cards)
  • An Installment Account is a form of debt that has a fixed payment amount and repayment period in which an individual can pay. (Example: Mortgage)
  • An Open Account has a balance that is to be paid in full every due date. (Example: Cell Phone Bills and Home Utilities)

New Credit (10%): New Credit is created when an individual requests an amount of credit in addition to their existing amount of credit. While making a single inquiry for new credit is likely to have little impact on your credit score, opening multiple credit accounts in a short amount of time can signal greater risk to lenders which can in turn decrease your score.

The Significance of Your Credit Score

Credit is connected to many aspects of your life and having a higher credit score can help you achieve your financial goals more easily. For example, having a good credit score can increase the likelihood of the following:

  • Receiving a loan for a car or house
  • Acquiring advantageous interest rates on loans
  • Obtaining credit cards
  • Being more attractive to employers
  • Renting an apartment
  • Paying lower insurance premiums

So, what can you do if you are not satisfied with your credit score? As was discussed above, the two factors dominating the makeup of your credit score are Payment History and Credit Utilization. The best strategies to increasing your credit score, then, revolve around improvements in these categories.

To improve the Payment History portion of your score, it is important to make sure you make all of your credit payments on time. One suggestion you may find helpful is to set reminders for yourself to make the payments or to enroll in automatic payments. Your credit score will rise when you make payments according to the dates they’re due over a long period of time.

To improve the Credit Utilization portion of your score, it is important to make an effort to lower your ratio of credit balance to credit limit. The best way to do this is by paying down your debt. You may also consider contacting your credit companies to see if you are eligible for an increased credit limit. The decision to increase your credit limit should not be taken lightly, however. As was discussed earlier, taking on too much new credit can negatively affect the New Credit portion of your score.

As a final note on this topic, whether or not you are satisfied with your credit score, we highly recommend that you regularly monitor your credit score and your credit report. You can obtain a free credit report every 12 months from each credit bureau: Equifax, Transunion, and Experian. This will provide you a consolidated report of your current credit and it’s history. We encourage you to investigate this report, make sure everything is accurate, and report any inaccuracies to the credit bureaus. Please see our post “A Careful Review of Your Credit Report” for our thoughts on best practices when reviewing your credit report.

Your credit score is tool that can help you achieve life goals. Be sure to evaluate your credit standing and make a goal to increase it if you are not satisfied. Everybody’s situation is unique; therefore, each individual will have a different strategy to raising their credit score. Of course, please reach out to anyone on the Financial Planning team if you have further questions!

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“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? Your playing small does not serve the world. There is nothing enlightened about shrinking so that others won't feel insecure around you. We are all meant to shine. And as we let our own light shine, we unconsciously give others permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” ~Marianne Williamson