Home > Credit Score > The Ultimate Guide to Credit Scores

Comments 18 Comments
Advertiser Disclosure


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 Credit.com 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!

Credit.com’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

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team