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Understanding Your Credit Score and How to Improve It

April 26, 2024
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Your credit score might seem like a mystery but a lot of information is wrapped up in those three digits. Your credit score contains your spending and payment habits. More importantly, to you, your credit score lets you know what kind of financial opportunities might be available and at what cost. Learn about what information goes into your credit score, what your rating means for your fiscal life and, if necessary, how to improve your credit score.

What is a Credit Score?

For something that holds so much sway over our lives, the actual meaning of a credit score isn’t that obvious. Your credit score is calculated from the information found in your credit report, which is a snapshot at your credit history. It details your lines of credit, such as credit cards and car loans, as well as credit information on public records such as bankruptcies. Some credit inquiries, called hard inquiries, will also impact your credit report.

Your credit score not only impacts whether you can get a loan, but it also affects whether you get a favorable interest rate. Your score might decide whether you qualify for a lease on a rental property, a car loan, or even a cell phone service plan.

It’s safe to say that your credit score has a huge impact on your life.

How Credit Scores Are Calculated

To gain an understanding of what elements make up good and bad credit scores, here is a simple breakdown:

  • 10% Credit Mix: Managing a variety of credit accounts such as credit cards, installment loans, and mortgage loans can help boost your credit score. This is why opening a credit card and managing it well can benefit your credit score.
  • 10% New Credit: Opening multiple new credit lines in a short period can ding your credit score. Try to wait at least six months between opening credit lines.
  • 15% Length of Credit History: An older account does better than a younger credit account.
  • 30% Amounts Owed: This takes into account how much credit you’re using versus how much is available to you.
  • 35% Payment History: This is the most important factor and the simplest. Do you pay your bills on time?

How to Check Your Credit Score

  • Checking Your Credit Score: If you want to check your credit score annually, you have the right to request one free copy from each of the reporting companies — Equifax, Experian, and TransUnion. If you stagger your credit report requests, you can get several in one year.
  • Monitoring Your Credit Score: If you want to protect your credit score from fraud, credit monitoring companies keep daily watch over your score. Many companies offer free basic plans.
  • Checking for Errors: Credit report errors happen! Check that all your information is correct to ensure the right data is attributed to your report. This includes checking to see account statuses are accurate (closed accounts aren’t open), data entry duplications do not exist, and prepping to dispute any errors.
  • Disputing Inaccuracies: You’ll want to dispute inaccuracies with each credit bureau that has a mistake in your report. If you’re worried about someone stealing your identity to use your credit, there are government resources you can report the information to. Credit bureaus are obligated to fix incomplete or inaccurate information on your credit report.

What is a Good Credit Score?

A credit score is a number between 300 and 850.he higher the score the better. Here’s a breakdown of the various credit score ranges.

  • 720-850: Anything over 720 is considered excellent, and 800 and above is amazing.
  • 690-719: This is a good credit score range.
  • 630-689: This credit score range is fair.
  • 300-629: Anything under 629 is bad.

If your credit score is higher, you’ll have better access to more credit at better interest rates. Having a high credit score can save you thousands of dollars when applying for a loan.

How To Improve Your Credit Score

  • Paying Bills on Time: Getting all your payments in on time is the number one way to maintain a healthy credit score. If you have a lot of payments to make, consider setting up a bill organizer and reminder app to ensure you don’t forget any payments. DCU offers automatic bill payment so that you’ll never fall behind on monthly payments.
  • Avoiding Opening Too Many New Accounts: If you open new lines of credit in quick succession, you’re raising a red flag for creditors. If you’re trying to improve your credit score, ignore those credit card offers that you’re getting in the mail and stick to the lines of credit you’ve been using.
  • Lengthening Credit History: While this can be improved by being a reliable credit user over a long period of time, sometimes people boost their credit history by becoming an authorized user of a credit card that might belong to a trusted relative with good credit history. Just be sure the credit history is good before you take action on this plan!
  • Reducing Credit Card Balances: This will help your credit score because when it comes to credit utilization, the lower the amount you’re using, the better.
    • Snowball: The snowball method of paying off credit card debt prioritizes focusing on paying off credit card balances with lower balances first. Then you move on to pay off the bigger debts. This way of taking on credit card debt can be very motivating for those looking to simplify their financial lives.
    • Avalanche Method: The avalanche method prioritizes paying off debt with the highest interest rates first. By focusing on accounts you owe more on and are paying more interest on, the avalanche method allows you to pay less interest over time.

Monitoring Your Credit Building Progress

Once you start improving your credit score, not only is it smart, it can be gratifying to track your credit score changes over time. Those who want to know how to maintain a good credit score will find annual credit checks might keep them on track. That way you’ll be able to celebrate milestones and notice when you’re going off track.

If you want to improve your credit score, consider assistance from an institution like DCU. Our not-for-profit credit union helps members improve their credit with counseling as well as financial education with financial tracking software. Our main message? Don’t be intimidated by those three numbers. Improving your credit score is simpler than you might think. When you start moving in the right direction, who knows where you’ll be in the future?

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.