Tori Dillinger, Administrative Assistant
Credit scores are one of those things that can really impact your life. Beyond the obvious applications such as applying for a loan, it is common for landlords and even employers to request to see your credit history. Despite this, what your credit score actually measures and what you can do to improve it is largely ambiguous. Even though you can’t know your exact credit score until you check it, there are some basics to how they work that can help you start to improve yours.
How credit scores are calculated
The three major credit bureaus, TransUnion, Equifax and Experian, determine your score using one of several algorithms. The algorithms vary depending on the credit reporting agency and the reason your score is being pulled, but they all look at the same 5 things:
Used credit vs. available credit
Types of credit
Length of credit history
All this information is pulled together and translated to a credit score ranging from 300 to 850. Below is a breakdown of how lenders assess credit scores. In general, having a score of 700 or more will give you the best chance of securing lines of credit and loans with the most favorable terms.
Credit Score Scale
Breaking down the determinates of credit
Your payment history is your personal record of paying on debts. Paying your bills on time helps to improve your credit score, while missed or late payments hurt your score. Things such as foreclosures, delinquencies, bankruptcies, wage attachments and collections will also negatively reflect on your payment history.
Used Credit vs. Available Credit
Used credit vs. available credit refers to the difference between how much you have on things such as a credit card, vs. how much is available to you. Keeping your credit balance low and paying debts off regularly will reflect positively on your credit score. Maxed out credit cards, especially on multiple accounts, decreases your credit score.
Types of Credit
There are multiple types of credit you might have. For example, mortgages, car loans, student loans and credit cards. Lenders like to see that you are able to handle multiple accounts of different types.
While having different lines of credit may help your credit score, opening new accounts usually decreases your score in the short term.
Length of Credit History
The longer your track record of making payments, the better for your credit score.
Feeling a little overwhelmed?
If you would like a more in-depth look at credit and how to improve yours, come to one of our upcoming Fair Shot classes. Each round of classes includes sessions on budgeting, banking, managing credit and preparing for homeownership. All classes are free to the public and participants who successfully complete both sessions will receive coupons good for one free Little Zip pizza and one free fountain drink from Azzip Pizza. There are also accompanying youth classes for students third grade and up. Click here to register.