Tips for Understanding Your Credit Score

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As you know, your credit score is important. How important? So important that an entire industry exists solely to monitor and report your credit score.

So, what does your score mean? It tells lenders (companies who offer lines of credit) whether or not you’re good about repaying your debts and paying them back on time. If you pay on time and don’t carry a lot of debt, then you’re a good credit risk, and you’ll get loans, credit cards, mortgages and great interest rates. If you pay late and max out your existing cards, you either won’t be eligible for additional loans or you’ll end up with much higher interest rates.

Understanding Your Credit Score: Who Are the Major Players?

When it comes to credit reports and credit scores, there are three major players: Experian, Equifax and TransUnion. These are the three credit reporting agencies, or credit bureaus, that collect information about your lending habits. These credit bureaus compile credit reports, which determine your credit score. These reports include several factors:

  • Your personal identifying information, such as current and past addresses and your Social Security Number.
  • Credit accounts called trade lines, which is essentially a list of creditors who report your credit usage and payment history.
  • Any public record information dealing with your finances, including bankruptcies, foreclosures, delinquent accounts, wage attachments, and anything from collection agencies.
  • Credit inquiries (anyone who requests your credit report) for the last two years.

Understanding Your Credit Score: What’s in a Credit Score?

All the information on your credit report is measured and weighed, and the bureaus assign a score to your report for lenders to use. Each bureau has a slightly different way of determining your score, but they should all be fairly similar. Some factors that weigh into your credit score count more than others:

  • Payment history (35%). On-time payments mean a higher score. Late payments, delinquent or overlimit accounts, bankruptcies, and liens will significantly lower your score.
  • Debt-to-Credit Ratio (30%). This is also called “revolving utilization” and is specific to your credit card accounts. If your credit limit is at $1,000, creditors don’t want to see you maxing out the entire credit limit. Try to keep your total revolving utilization ratio as low as possible – 30 percent is good but 25 percent is better and if you really want to maximize your credit score, aim to keep your revolving utilization at 10 percent or less. This goes for your total revolving utilization and for each individual credit card. Maxing out your credit lines can lower your score. If you have an excess of available credit, ask your credit issuer to reduce the amount on credit lines you’re not utilizing.
  • Length of credit history (15%). This shows how long you have been using credit and how you have managed your finances in the past. The longer your credit history, the better, so avoid closing accounts which have been opened longer, even if you don’t use them.
  • New credit accounts and inquiries (10%). This includes accounts you’ve opened recently, and recent inquiries from companies you have applied to for credit. Credit inquiries remain on your credit report for two years but are only factored into your credit score for the first 12 months. The main point to remember is that applying for a lot of credit in a short period of time can lower your score.
  • Diversity of Credit (10%). Having credit cards is a great credit builder, but lenders want to see that you can manage other types of credit as well, such as installment loans and mortgages.

Understanding Your Credit Score: Keeping Tabs on Your Credit Score

While creditors and credit bureaus are watching your credit, so should you. Experts recommend that you review your credit reports at all three bureaus at least once a year to make sure there are no inaccuracies. To order a free copy of your credit reports, use the federally mandated website at or call (877) 322-8228.

If you do find errors, each credit report will direct you on how to file credit disputes with each of the individual credit bureaus.

In the end, your credit score is your responsibility. Making the grade is a lifelong test on which you’re constantly being graded. Turning good payment and credit usage behaviors into habit should be a top priority.