How to Manage Your Credit Score

Scores range from 300 to 850 and are used by lenders to measure your level of credit risk. Creditors normally define their own scoring categories for what may be excellent, good, fair, poor and bad. Most consider scores of 750 and above to be excellent. In the long run, a poor credit score leads to unfavorable interest rates, higher insurance premiums and other potential threats to your financial health. It can wind up costing you thousands of dollars, so it’s important to take the necessary steps to keep your credit in good standing.There are many types of  FICO credit scores. While each has a different formula used to calculate your score, the factors used to determine your score are relatively similar. FICO stands for Fair Isaac Corporation, the first company to offer a credit-risk model with a score.

Here are some of the key factors that impact your credit score and some tips for how you can manage your scores. 

Payment History

Your payment history has a major impact on your credit score. In fact, it is the most important factor in your score and is negatively impacted by any late payments you may have had. Late payments can stay on your report for up to seven years and, unfortunately, there is no way to make them disappear. Your best bet for improving your score is to make sure all your bills are paid on time. A couple of ways to avoid late payments is to have your bills on autopay or set reminders in your phone calendar.

Credit Usage 

Your credit usage, also known as credit utilization ratio, also has a major impact. It is calculated by taking the total outstanding balance across all your credit cards and dividing it by your total credit limit. Typically you want to keep this number below 30%. The lower the balance you can keep on your credit cards, the better it will be for your score. This factor has a significant impact because FICO uses it to judge how responsible you are with credit. Techniques to lower your credit utilization ratio include keeping your credit card balances low, making multiple payments throughout the month and asking for credit limit increases.

Derogatory Marks

Derogatory marks, which are any collections, foreclosures, tax liens, bankruptcies, debt settlement or civil judgments that are on your report, can negatively affect your credit score for seven to 10 years and sometimes longer. It is increasingly important to check each of your credit reports at least once per year.The Federal Trade Commission revealed in a 2012 study that one in five consumers found an error on one or more of their credit reports. If you do find an error or if something looks off, there are credit repair services that you may hire to help dispute them.

Using the free website Annual Credit Report, you should check your TransUnion, Equifax, and Experian credit reports once every 12 months. 

Length of Credit History

In order to have a credit score, FICO needs to see some type of credit history. A short history will be undesirable to your score, but there’s not much you can do other than wait. A good average credit age is five to six years and anything above seven years is considered excellent. Although this doesn’t have as high of an impact as the first three factors, it still plays a big role in your credit score.Do not open too many accounts within a short period of time because it will lower your overall credit age.

Number and Variety of Accounts

Contrary to popular belief, it’s actually better to have more credit lines than less. Not only is it important to have numerous accounts, lenders also like to see that you’re able to manage different types of accounts. This includes credit cards, car loans, mortgages and student loans.Although there isn’t a magic number of accounts you should have to optimize your credit score, there is a balancing act you should keep in mind. More lines of credit positively affects your utilization ratio, but opening too many credit lines in a short period of time will negatively impact your length of credit history.

Hard Inquiries

Anytime you apply for credit, a hard inquiry is placed on your report. These inquiries can show for up to two years, but typically the effects they have on your credit score are small and will fade over time. It’s important to check for these on your credit report and make sure you recognize the inquiry, otherwise it can be a sign of fraud or identity theft.

The Bottom Line

A good credit score is essential to your financial health. Understanding what impacts your score and taking the steps to manage it can save you thousands of dollars. 

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