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Your Credit Score Demystified

Credit scores can be confusing, but they really don't have to be!

Credit scores can be a complicated thing to understand. This short guide will help you better understand your credit score, and credit scores in general.

what makes up a credit score

Taking the Mystery Out Of Your Credit Score

Hoping to take out a mortgage loan? Do you need to finance a car? Are you applying for a new job?

Then you need to know about your three-digit credit score.

Your credit score, often referred to as your FICO score, is the single most important number in determining if you can borrow money from mortgage, auto or personal lenders. This score also determines the interest rates that lenders will charge you. And if you’re applying for a job, you might be surprised to learn that many companies check credit scores when weighing the merits of applicants.

Because these scores are so important, it’s necessary for you to understand how they work and, more importantly, the steps you can take to improve your own scores.

In general, lenders prefer to work with borrowers whose credit scores are 740 or higher. These borrowers will qualify for the lowest interest rates and fees. They’ll also receive the best credit-card offers.

Borrowers whose scores are below 620, though, will struggle to qualify for loans from traditional lenders. Instead, they’ll usually have to take out sub-prime loans that come with often sky-high interest rates. They’ll also struggle to qualify for all but the least attractive of credit-card offers.

What makes up your credit score? The most important factor is your history of paying bills. If you have a history of making late payments or skipping payments altogether, your credit score will plummet. That’s why one of the first steps toward rebuilding your credit score involves starting a new history of paying your bills, all of them, on time each month.

Your credit score will fall, too, if you owe a lot of money on multiple credit-card accounts. Lenders view this as the sign of consumers who are overextended financially. They worry that adding one more loan to your burden will cause you to default on your payments.

The amount of years in which you’ve had access to credit also impacts your credit score. In general, the longer your credit history, the higher your credit score will be. Lenders like to work with borrowers who have shown that they already know how to handle the responsibility of paying their bills on time.

Other factors will absolutely wreck your credit score. For instance, declaring personal bankruptcy, whether Chapter 13 or the more severe Chapter 7, will send your credit score crashing. And these bad marks on your credit report take a long time to disappear. A Chapter 13 bankruptcy filing will remain on your credit history for seven years, while a Chapter 7 will stay for 10.

Housing foreclosures are also highly detrimental to your credit score. These negative marks stay on your credit history for seven years, too.

6 Ways to Improve Credit Scores and Get Free From Bad Credit

Credit scores are often mysterious and misunderstood - but these three-digit numbers have big power over our financial lives, because they make it easier (or harder) for people to borrow money.

how-to-improve-your-credit-score-1 Your credit score is an indicator of how trustworthy creditors (banks, mortgage companies, credit card companies) consider you to be. If you have a good credit score, you get “cheaper money” in the form of lower interest rates on your loans whenever you borrow money. People who have good credit scores will save thousands of dollars (or tens of thousands of dollars) when they borrow money to buy a house or buy a car or make a major purchase.

If you have a lower credit score, you will pay more money in loan interest over the course of your life - and you might find it more difficult to get approved for a loan in the first place. Other consequences of bad credit are more subtle.

Improving your credit score goes hand in hand with improving your overall financial condition. Here are a few tips for how you can improve your credit score starting today:

Get a Free Credit Report

Knowledge is power. The first thing you should do is see exactly what is on your credit history by ordering a free credit report from

There are many websites that offer a free credit report, but many of them will tie various services or products to providing your “free” credit report. is the only official site set up by the credit reporting agencies to give consumers their free credit reports each year as required by law.

how-to-improve-your-credit-score-4 Seeing your credit report is important because it shows you the full picture of your debts and credit accounts and helps you avoid getting penalized for errors on it. According to a recent study from the FTC, one in four American consumers found mistakes on their credit reports, and 5% of consumers had mistakes that were so serious it could have affected their ability to get a loan at favorable terms.

Checking your credit report also gives you protection against identity theft. In case someone has stolen your identity to open credit card accounts in your name, it will show up on your credit report.

If you see anything on your credit report that you did not authorize or do not understand, you can dispute it with the credit reporting agency. For example, if you see a credit card account that you did not open, but it is still listed under your name, you can talk to the credit card company and ask to have the account closed. Or if your credit report claims that you missed a payment on your car loan, even though you have never missed a payment, you can dispute these incorrect statements as well.

Know Your Credit Score

Getting a free credit report is important, but it will not tell you your credit score. Do you know what your credit score is? According to a recent survey from Harris Interactive and, nearly half of all American adults do not know their own credit score. If you want to get an idea of your credit score, you can use a free service such as Credit Karma.

Credit scores range from 300 to 850 (higher is better), and your credit score can fluctuate for various reasons, depending on how promptly you pay your bills, how many credit cards you have, and how recently you have applied for credit (and how often). Each credit rating agency has a slightly different model, so you might have three different credit scores from the three major credit agencies - In general, a “good” credit score is considered to be anything from around 650-750.

Check Your Balances

how-to-improve-your-credit-score-2 If you are carrying credit card debt on multiple credit cards, the percentage of credit that you are using matters to your score. Try to pay down your debts until you are only using 35% or less of your available credit on each account. (For example, if you have a credit card with a $10,000 limit, you should make sure that your balance is less than $3,500.)

According to Credit Karma, 35% credit utilization is the cutoff point that affects your credit score. Credit reporting agencies want to see that you are not using too much of your available credit limits, as this can be a sign that you are getting overburdened with debt and are becoming a risk to fail to repay the money you've borrowed. If you find managing your different accounts to be difficult, looking into balance transfer credit cards may be a good option.

Pay Your Bills on Time

According to FICO, payment history makes up approximately 35% of your overall credit score. Making sure that you make payments on time - even if it’s just the minimum payment - is one of the best ways to improve your credit score fast. Set up payment reminders via e-mail or text, or consider making automatic monthly payments to your creditors.

Cancel Some Credit Accounts - But Make Sure They’re the Right Ones

how-to-improve-your-credit-score-3 Many people who are trying to get out from under credit card debt choose to cancel some credit card accounts - but be careful not to cancel your oldest account.

For example, if you have had a certain credit card for 10 years or more, and have recently opened two or three other credit accounts, keep open your oldest account and consider canceling one or more of the newest ones. The longer you’ve had credit history with an account, the better your credit score will look - because credit reporting agencies like to see signs that you can use credit responsibly over a longer period of time.

Starting Over? Get a Secured Credit Card

If you have declared bankruptcy, are a new graduate who is just beginning to establish a credit history, or if you have bad credit and cannot get approved for a credit card, consider signing up for a secured credit card. With a secured credit card, you can only borrow as much money as you have saved or put up as collateral. But every time you make an on-time payment with your secured credit card, you are building up your credit history and improving your credit score.

Getting a better credit score takes time, discipline and focus, but it can be done. Your credit score is a reflection of your overall financial stability and organization. Improve one area of your financial life, and the credit score will follow.

5 Surprising Ways To Destroy Your Credit

The average credit score in the United States isn't that great, and some of it might have to do with a lack of financial education. The latest results of FINRA's financial capability survey indicate that there is a serious lack of financial literacy, and that includes understanding matters of credit.

One of the ways that consumers might be ill-informed about credit is the way that non-credit items can drag down credit scores. If you aren't careful, seemingly insignificant mistakes can result in bad credit. And having bad credit can mean more than just higher interest rates.

Surprise 1: Improperly Canceled Gym Memberships

gyms-destroy-credit When you sign up for a gym membership, you usually sign a contract that specifies the actions you need to take in order to properly cancel. This might include providing 60 days' notice, maintaining your membership for a minimal amount of time, or canceling in person (and filling out additional paperwork).

If you don't cancel your gym membership properly, the gym will still attempt to charge your monthly fee. You might even cancel an automatic payment with your bank or credit card. No matter how you do it, the gym thinks that you are still a member and that you owe money. After a couple months of non-payment, the gym can report you to a credit bureau, and that will lower your credit score.

Surprise 2: Traffic Tickets

Scofflaws are at risk for more than the possibility of legal consequences. Some cities, counties, and states report unpaid traffic and parking tickets to credit bureaus. If you receive a citation -- even if it's in another state -- and you don't pay, you could find your delinquency reported to the credit bureaus. The situation could become even more dire if the jurisdiction turns your account over to collections.

Surprise 3: Unpaid Library Fines

libraries-destroy-credit When you incur library fines, it's not exactly a loan. However, your unpaid fines can be treated as credit if the library decides to turn your account over to a collections agency. Anytime a collections account shows up on your credit report, it can lower your credit score.

Surprise 4: New Cell Phones

It surprises many that credit checks are increasingly required when consumers sign up for new cell phones. Many cell phone providers run a hard inquiry before approving a new cell phone service account. This is because providers want to make sure that you are likely to pay your bill. If your credit report sends up red flags, you might be required to pay for monthly service in advance.

Since the credit check is a hard inquiry, it can bring your credit score down. Realize, too, that many cable and satellite TV providers, and Internet providers, also perform a hard credit inquiry before approving a new account.

Surprise 5: Missed Utility Payments

utilities-destroy-credit Missed utility payments may result in having services cut off, but many consumers don't realize that they can also impact their credit standing. Utility companies can report missed payments to the credit bureaus, and even turn accounts over to collections.

Whether it's a lapse in settling the account when you move, or whether you are having trouble making your payments, the utility company can report you.

The Bottom Line

Just because it isn't "officially" a loan doesn't mean that it can't impact your credit score and lead to bad credit. Almost anytime you have an agreement to pay for something and you miss payments there is the potential for your delinquency to be reported to the credit bureaus, or even turned over to a collection agency, making the impact greater.

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