Know your score

MALA BLOMQUIST | MANAGING EDITOR

If you have ever opened a credit card, purchased a car with a loan or bought a home with a mortgage, chances are you are aware of your credit score. Credit scores range from 300-850 (the higher the better) and are one piece of the puzzle that lenders look at when determining whether or not to extend a loan or credit card. A good credit score can help the borrower access a greater variety of loan offers, lower interest rates and better terms.

The credit score tells the company how likely you are to pay your debts on time and is calculated using a mathematical formula — called a scoring model — based on the information located in your credit report. The three major providers of credit reports are Equifax, Experian and TransUnion.

According to Experian, the common factors that credit scoring models consider are often split into five categories:

• Payment history: Making on-time payments on your credit accounts can help your scores. But missing payments, having an account sent to collections or filing bankruptcy could hurt your scores.

• Credit usage: How many of your accounts have balances, how much you owe and your credit utilization rate — the portion of your credit limit that you’re using on revolving accounts — all come into play here.

• Length of credit history: This category includes the average age of all your credit accounts, along with the age of your oldest and newest accounts.

• Types of accounts: Also called “credit mix,” this considers whether you’re managing both installment accounts (such as a car loan, personal loan or mortgage) and revolving accounts (such as credit cards and other types of credit lines). Showing that you can manage both types of accounts responsibly generally help your scores.

• Recent activity: This considers whether you’ve recently applied for or opened new accounts. Also, you do not have just one credit score. Each score depends on the data used to calculate it, the scoring model (which may depend on the type of loan product the score will be used for) and even the day the score was calculated based on your credit report.

If you are looking to improve your credit score, there will be specific steps to take based on your unique situation. But according to Equifax, there are some factors to consider that can help almost anyone boost their credit score:

• Review your credit reports. When looking to improve your credit score, a good first step is to review your credit reports.

Federal law gives you the right to get a free copy of your credit report every 12 months from each of the three nationwide credit bureaus: Equifax, Experian and TransUnion. Due to hardships created by the pandemic, everyone in the United States also can get a free credit report each week from each of these three agencies through December 2023.

After making sure there are no inaccuracies or signs of identity theft and fraud, check to see if you have any unpaid balances or accounts that have gone into collections. It’s a good idea to tackle this negative information first by paying off as many old debts as you can.

• Pay on time. One of the best things you can do to improve your credit score is to pay your debts on time and in full whenever possible. Payment history makes up a significant chunk of your credit score, so it’s important to avoid late payments. If you struggle with on-time payments, consider using automatic payments for your accounts or setting up alerts so you are reminded to pay.

• Keep your credit utilization rate low. As mentioned above, it’s typically best to keep your credit utilization rate at or below 30%. Outside of reducing your spending, you can lower your utilization rate by asking your credit card company for a credit limit increase.

• Limit applying for new accounts. Applying for new lines of credit will usually lead to a hard inquiry, which can negatively affect your credit score. So, if you’re hoping to improve your score, try to limit how often you apply for new accounts. Opening a new line of credit can also decrease the average age, or length, of your credit history, which is another factor used in calculating your credit score.

• Keep old accounts open When trying to increase your score, avoid closing any old accounts that have been paid off, even if you no longer use them. Keeping the accounts open will help maintain the length of your credit history.

Most negative information, like late payments, will generally remain on your credit report for up to seven years. However, Chapter 7 bankruptcies can linger for up to 10 years.

The amount of time it takes to improve a damaged credit score varies depending on the circumstances and there’s no one-size-fits-all solution that will change your credit score overnight. Improving your credit score takes effort and patience. JN

Equifax, Experian and TransUnion have a toll-free telephone number and centralized website to order your free annual reports in one place. Call 877-3228228 or visit annualcreditreport.com.

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