How Credit Scoring Works

A credit score is a summary of your borrowing history from the past seven years. This simple three-digit numbers tells lenders whether or not you are creditworthy. The credit bureau takes everything that is in your credit report, plugs it into a complex formula, the result of which is your credit score.

Credit scores range from 300 – 850. The higher the score, the better. Borrowers who have credit scores below 620 are considered to be high risk. They are more likely to be denied credit. If they are approved, they have to pay a higher interest rate than borrowers with better credit scores. A score of 550 is considered awful.

The average credit score is 680. A score of 720 or above is generally considered good. However, in the current economic climate, you would need a score of 760 or above to get the best interest rates, as lenders are reluctant to take any kind of risks.

A score above 800 is excellent. Only 13% of the population has scores in the 800-850 range.

7 ways you can improve your credit score

1. Check your credit report for errors. Do this at least once a year. A simple typo or a reporting mistake can ruin your credit score. If you do find a mistake, you can file a dispute directly with the credit bureau that issued the report. All you have to do is fill in the form on their website.

2. Make all of your payments on time. If you’re so much as a day late, it can reflect negatively on your credit score. Get your finances organized, so you don’t miss due dates. This will also help you avoid those annoying (and costly) late fees.

3. Keep old accounts open even once you’ve paid off the balances. This will help improve the length of your credit history. If you absolutely have to close old accounts, don’t close them all at once. Space it out over several months.

4. Don’t apply for too many new accounts in a short period of time. Don’t apply for credit cards or loans right before applying for a mortgage.

5. Do not max out your credit limits. It will make you look overextended. Lenders don’t want to lend to people who they suspect have already borrowed too much. Pay down your debts as much as you can.

6. Have several different types of credit, whether it’s store cards, credit cards, car leases, mortgages, loans, etc. Variety is good.

7. Avoid changing credit cards too often. Stick with the same card or cards for several years. Lenders dislike customers who switch to a new credit card each time the introductory period runs out.

Getting help

If you’re still not certain how to improve your credit score, consider getting help from a professional. There are many non-profit credit counseling agencies that can help you repair your credit history and raise your credit score. They will counsel you on your options and help you stick to a plan.

How Credit Scoring Works

7 ways you can improve your credit score

Getting help

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