Credit Score: How It Works and What You Can Do to Fix It

by Z

A lot of Americans have trouble keeping up a good credit score, and you may find it relieving to know that you’re not alone in this situation. 

Even though your score may not be in its best shape, there are still things you can do to help influence it. 

In fact, a growing number of people are turning to strategies that may help improve their credit score, as it’s a long-term investment that usually pays off. 

What you may not know, however, is that you could start right away and that these strategies are available to just about anyone. 

Keep on reading and learn more about what you can do to help increase your credit score and secure a future you’ve always wanted with ease.

What you need to know

The first step to improving your credit score is actually understanding how the scoring system works, as well as all the details about your own credit score. 

The number can range anywhere from 300 to 850, and it defines how creditworthy a customer may be, which helps banks decide whether they’re willing to loan you money or not. 

If your score is above average, lenders will see you as a reliable borrower, and you won’t have trouble lending money for your needs, so long as you manage to keep your credit score above a certain level.

Essentially, your credit score is the result of a number of data calculations based on your credit report, which includes all your credit accounts, any debt you’ve accumulated, and the payments you’ve made in the past. 

Credit bureaus are the agencies responsible for calculating your credit score, and currently, only two models exist in the US. 

Some agencies choose to implement the VantageScore model, although the FICO scoring method is the most commonly used across a number of credit bureaus in the US. 

How is it calculated?

Different aspects of your credit report will have a different impact on your final score, and it’s important to understand exactly how this works if you want to stay ahead. 

The information in the credit report is generally divided into 5 different categories, those being your payment background, credit usage ratio, age of credit, hard pulls, and the different types of credit you’ve taken on. 

Each of them has a lower impact on your overall score, and they were listed in descending order, meaning that the background of all your payments is the backbone of your credit score. 

Further down we’ll go over each of them in a bit more detail, to give you a proper understanding of what each of these 5 categories represents.

Background of payments (35%)

In and of itself, your payment background is the most important aspect that goes toward your final credit score calculation, which means that you should take special care of it. 

This includes any late payments you may have or have already made, as well as how late you actually paid them, while also keeping track of the on-time payments you’ve made and the accounts that were collected. 

Seeing as lenders need extensive information on you as a borrower and your tendencies to pay the debt back on time, it’s only reasonable for this information to be as crucial as it is.

Credit usage ratio (30%)

This ratio is calculated as the fraction between the money you’ve already borrowed and the amount of credit you have left. 

Your credit usage ratio exists to give you and the lender a clearer image of how much credit you’re actually using compared to your approved limits. 

Essentially, you should try to keep your credit utilization at or below 30%, as anything above that number can be considered excessive.

By doing this, you’re ensuring that you’ll have enough to pay back the loan without issue, sparing yourself the stress that may come when you’re overdue on some payments that you simply can’t make.

Age of credit (15%)

Also known as the background of your credit, this aspect focuses on the amount of time you’ve had credit, the oldest as well as the latest credit account you’ve made, and finally, the average age of your credit. 

Even though this isn’t as important information to lenders, it still amounts to 15% of your credit score, and you’ll want to keep it in check just in case your credit score needs a checkup down the line.

Hard pulls (10%)

Technically, your credit score can have two types of inquiries, one of which doesn’t have an effect on it at all, that being soft inquiries, whereas hard inquiries amount to 10% of your total credit score. 

A hard inquiry on your credit is usually made when a lender needs a better picture of how risky it may be to borrow your money, although each hard inquiry requires written authorization from you, the account holder.

Thankfully, these inquiries tend to fall off within 2 years after being made, so there’s no need to worry even if a lender does demand one to be made on your credit.

Different types of credit (10%)

Much like hard inquiries, the different kinds of credit you’ve taken on may not have a huge impact on your credit score, although this doesn’t mean you shouldn’t become aware of them from time to time. 

The different kinds of credit can range from installment loans to credit cards, and the more diverse your credit history is, the better your chances of being approved for a loan become. 

Despite this, it’s not recommended to go out of your way to get different types of credit just to improve your score, as it could ultimately be considered irresponsible.

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