Credit Score

Learn the factors that make up your score so you can take action to boost it.

A credit score is a number that allows lenders to judge your ability to pay back loans, such as car loans and credit card debt. Lenders also use the score to determine if they should raise the credit limit on an existing account or even to decide what interest rate to charge on a new or existing loan.

What factors produce your credit score?

To create a credit score, analysts traditionally use information in credit reports, account histories, or applications. There are a variety of different credit scores a company can use to judge your credit worthiness, but most of them are based on the formula created by the Fair, Isaac, and Company, Inc. They are known as “FICO scores”. The top three credit bureaus — Equifax, Experian and TransUnion each have their own version of devising a credit score for consumers. You can purchase your score from each of these three companies, but be aware that they may vary slightly from one another.

With a FICO score, the higher the number, the better the score. The scores generally range from 300, which is poor, to 850, which is excellent. According to FICO, there are five main factors that go into your credit score:

  • Payment History 35%
    Shows how responsible you’ve been at paying back money borrowed on time.
  • Credit Utilization Ratio 30%
    How much credit you’re currently using relevant to the total available credit you have.
  • Length of Credit History 15%
    Shows how long you’ve been using credit.
  • New Credit 10%
    Details how many times you’ve applied for credit in the past 6 months to one year.
  • Type of Credit in Use 10%
    Do you hold the right types of debt and do you have diverse debt holdings?

Steps to improve your credit score

When carefully examining the five factors, you’ll notice that payment history and credit utilization are the largest percentages in the FICO formula. That means consistently paying your debt on time and efficiently paying debt off to keep it minimized will improve your chances of raising your credit score. A good rule of thumb is to only charge about 30 percent of your credit limit with any given lender.

Also, don’t apply for new credit cards just to have a better variety of cards. Apply only when necessary. And remember, you won’t be able to improve your score if you spend money that you don’t have – this leads to further debt and the inability to pay more than the minimum monthly payments on your cards.

How much will a poor credit score cost me?

Based on 2013 data from Experian, you’ll notice a poor score can cost you thousands. This is based on a $26,500, 65-month auto loan:

Credit score Interest rate Monthly payment
Excellent 2.64% $437.98
Fair 6.14% $480.27
Poor 9.42% $522.08

In one year the person with the poor score pays $1,000 more than the excellent score. That’s why it’s essential to pay down your debt and make timely payments each month.

How long does it take to restore my credit score?

If you’ve damaged your credit, it will take time to rebuild your score because you have to improve your credit history by paying bills on time, paying down your debt and waiting for the negative information to expire.

This information includes late payments, collection accounts, charge-offs and other public record items, which generally stay on your report for seven years. Chapter 7 bankruptcy remains on file for 10 years and unpaid tax liens as much as 15 years. The major credit bureaus may remove Chapter 13 bankruptcies (where you pay back some of your debts) seven years from the date of filing.

The older negative information becomes, the less of an impact it has on your score. Recent positive credit information can help improve your score, even if your credit report still contains negative items.

How will credit counseling affect my credit score?

Credit scores usually don’t suffer if you decide to join a debt management program through a credit counseling service. Your score may actually improve, because you’ll be paying off your debt on time each month. Also, the FICO formula does not take into account that you’re enrolled in a program and many creditors will not report anything to the credit bureaus that indicates an account is being repaid through a credit counseling agency.

If you’re worried about what your credit score will do to your future finances, call Consolidated Credit today. A certified credit counselor can evaluate your debts to help you better understand your credit and finances. Call to speak with a certified credit counselor now. You can also take the first step online with a free Debt & Budget Analysis.