The Ultimate Guide to Credit Scores

The questions from readers keep pouring in and they almost all boil down to the same thing:

“How do I improve my credit scores?” or

“What effect will this action (short sale, credit counseling, etc.) have on my credit scores?”

They can both be tough questions to answer. After all, credit scores are calculated using lots of different factors and everyone’s report — and the scores that result — are individual. But there are also common misconceptions that, if dispelled, can stop someone from spinning their wheels, or worse, doing more damage.

A Very Good Place to Start

Start by getting your credit reports and scores. We can’t tell you how many people ask about improving their credit scores, but they have no idea where they stand now.  You need to get as much information as possible about two things:

  1. Where you stand now, and
  2. What main factors are influencing your scores.

Without this information, it’s pointless to speculate on what may or may not help, or what may or may not happen. Take advantage of any opportunity you have to gather information about your scores. For example, if you have been turned down for credit, or charged more for credit or insurance as the result of a credit score, you must be given a written disclosure that lists the main factors that contributed to your score along with information on how to order a free copy of your credit report from the reporting agency that supplied it for that decision. Read it and take advantage of it.

If you are offered a free credit report or score by your financial institution, or as the result of a data breach, take it. You can also get a free credit score from that will explain the main factors influencing your score.

Breaking the Code

The next step will be to decode your credit scores. FICO scores and the forthcoming VantageScore 3.0 operate on a credit score range scale of 300-850. But more important than the number you get will be the main factors that are influencing your scores.

If you received your credit scores from multiple sources (a lender and a website offering credit scores, for example) the numbers you see will almost always be different from each other — even if you requested them on the same day. That’s because there are many different credit scoring models available. One score isn’t necessarily “wrong,” but in both cases you should focus on what areas are strong, and which ones need work.

The FICO Formula Is Just a Start

You’ve probably read that FICO breaks down credit scores into five main categories.  If any of these areas of your credit aren’t strong, you’ll have some work to do.

Your Payment History — 35% of your score

You know that paying your bills on time is good for your credit rating. But what if the damage is already done? You may be able to dilute your bad credit for a better credit score.  You can even start to rebuild your credit as soon as you have filed for bankruptcy, but be careful: there are a lot of myths about bankruptcy and credit scores and you’ll want to make sure you are getting good advice.

If your report lists debts that went into collections, understand that paying off collection accounts won’t likely help your FICO scores in the short term but it could prevent you from being sued for the debt. Do make sure that you aren’t being penalized by duplicate collection accounts.

How Much You Owe — 30% of your score

Here, one of the most important things most scores look at is how close you are to your credit limits. In industry terms, it’s called “credit utilization.” Keeping balances low on your credit score is usually helpful.

This factor can get confusing, though. For example, how the credit score will treat a home equity loan depends in part on which version of the scoring model is being used — and that’s not something you will know. And we’ve heard from readers who worry that having too much credit will hurt their scores, though in many cases that’s just not true.

By the way, paying off credit cards can have a positive impact, provided you don’t close all your accounts when your balances reach zero. Paying off a loan may not have the same impact, but can save you money in interest. Just be careful you don’t lose your credit score when you become debt-free.

Age of Credit History — 15% of your score

When it comes to building your credit, older accounts are generally better for your credit. If you have just started establishing credit, there aren’t any great shortcuts here, though some consumers have tried to use “piggybacking” to try to add older accounts to their reports. But once you have several credit references under your belt, one of the things you can do is to open new accounts sparingly, as that will bring down your average account age.

New Credit Inquiries — 10% of your score

Every time someone reviews your credit report, an inquiry will be created. Even though these make up a small part of the scoring formula, we find that many people worry a lot about credit inquiries. Their fears are often overblown, like the reader who complained that inquiries dropped his score by 104 points. On the other hand, this is a factor you usually have some control over. If you are working on building your credit, limiting the number of inquiries can be helpful. (Checking your own credit scores through a monitoring service does not hurt your scores, though.)

Types of Credit — 10% of your score

Consumers who score highest for this factor usually have a mix of different types of accounts, including installment loans like mortgages, student loans, or an auto loan; and revolving accounts like credit cards. The types of credit cards you carry may not matter as much, though it’s not a bad idea to have at least one major credit card in addition to a retail card.

What if an account you’ve paid on time is missing from your reports? If the lender doesn’t report accounts, then there probably isn’t much you can do, though it is worth taking a closer look to make sure that it’s not due to a mix-up. You can also check out the consumer reporting agency eCredable, which allows you to build credit using bills you already pay.

Finally, if your scores are already strong, then trying to aim for a perfect credit score can be a mistake. It may backfire. Aim high, but don’t obsess!’s Ultimate Guide series is designed to gather our most helpful stories on a particular topic. We encourage you to read the entire articles that we have referenced in this story. If you still have questions, feel free to post them as comments on the relevant story and we will do our best to respond.

Image: iStockphoto

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