Understanding Your Credit Score: What Factors Matter Most

Few things in life are tracked, reported, and scored like our credit activities. But then, few things in life have as far-reaching consequences as the way we manage our credit. Your credit score is a key determinant in many aspects of your financial life, such as whether you can qualify for a mortgage, how much you’ ll pay in interest charges, and whether you will be hired for a job. Suffice it to say, it’ s essential to know your score.

If it’ s not what it could be, it would be imperative to embark upon a plan to improve your score. And, if you think it’ s where it should be, it is important to realize that your score can more easily slide backwards than it can climb upwards. Raising and maintaining a good credit score requires a continuous and deliberate effort. Using a systematic approach can ensure it is always moving in the right direction.

Know Your Score

You must know the score if you expect to improve it. Consumers can obtain one free credit report from each of the credit bureaus once per year. You can order one directly from TransUnion, Equifax, and Experian, or you can go through AnnualCreditReport.com. It is recommended that you order them at different times throughout the year so you can check for changes in your report and your score. It is important to note that not all credit scores are created equal.

Each of the credit bureaus has its own formula and method of scoring, and their scores may differ somewhat from the FICO score, which is what the lenders use. But, at least you can use their scores to check your progress.

Clean Your Report Regularly

Reporting errors, including incorrect names and addresses, crossed Social Security numbers, and misreported payments or credit lines, are common. Left alone, they can wreak havoc on your credit score. It is the credit bureau’ s legal responsibility to ensure your reports are error-free. As soon as you see an error, contact the credit bureau by letter. If they don’ t correct the mistake immediately, you should write to the Fair Trade Commission (FTC). Eventually, it will get fixed.

Use Your Credit

Some people try to "protect" their credit score by not using their credit. This could actually have the opposite effect and hurt your score. Your credit score is a measure of how well you manage credit, and the credit bureaus want to see an ongoing history of payments, as well as your ability to keep your debt-to-limit ratio low. Don’ t close any credit accounts, as that could temporarily lower your score. To keep your score moving forward, use one credit card to make your regular budgeted purchases each month, such as gas and food, and then pay off the balance in full.

Keep Balances Low

The credit bureaus also score your credit based on how much you rely on it. Too much reliance can cause your score to drop. The measure they use is the ratio of your outstanding debt to your credit limit. The general rule is to keep your debt on any one credit card below 30%, the lower the better.

Put Some Variety in Your Credit

Your score could drop if your sole source of credit comes from credit cards. The credit bureaus want to see a mix of different types of debt, such as an installment or auto loan, and less reliance on revolving debt.

Apply for Credit Judiciously

Whenever you apply for credit, your credit report records a credit inquiry, which, if it occurs too frequently, will lower your score. More than two inquiries in six months can hurt your score. Avoid opening store credit accounts just to get that extra 10% off your purchase; it’ s not worth it. To maximize the benefits of a balance transfer offer, apply only once every six months.

Managing your credit and keeping your score moving forward is not a full-time job; however, it does require a conscious effort. Some people subscribe to credit monitoring services ($10 - $20 per month), which provide weekly or monthly tracking of your credit report and score, along with any alerts to changes in your report. Many banks and credit card companies offer a free version of credit monitoring. In addition to providing a much clearer picture of your credit, it also helps you stay on top of it automatically.