How to Understand and Improve Your Credit Score

Happy Friday morning everyone! I hope your holiday season has been wonderful so far. Last week’s post was about credit cards, and today’s is about how to understand and improve your credit score.

Whenever you apply for credit, the potential lender will check your credit score, in conjunction with your credit report, to determine if you are eligible for a line of credit and how much you are eligible for. Your credit score will determine the interest rate you pay on a new car, a mortgage, or credit card. You won’t be able to buy a house without a decent credit score (unless you pay upfront). Credit scores are often mysterious and misunderstood. What exactly determines if you have a good credit score, and how do you improve it?

The credit bureaus

Experian, Equifax, and TransUnion are the three credit bureaus in the U.S. Your credit report should look similar for all three bureaus. The amount of credit inquiries will usually be different between the bureaus, though; this is because when you apply for credit, the lender typically doesn’t check with all three bureaus. Hard credit inquiries will only show up with the credit bureau(s) your potential lender checked with.

It’s important to keep tabs on your credit report to make sure nothing shows up that you didn’t authorize. There are many different “free” credit monitoring services out there like Credit Karma. I say “free” because they make money by showing you ads and giving you “recommendations” based on your credit report. They will monitor your report and score for free, but they will also try to get you to open new lines of credit every step of the way.

Instead of using Credit Karma, I would recommend using a credit monitoring service provided by your credit card company. Most card issuers provide the service free of charge for all cardholders. In my experience, they won’t try as hard to sell you products and services you don’t need. is the only truly free website to check your credit report. You can check each bureau free once per year. Americans are entitled to one free credit report from each bureau per year, and Annual Credit Report is the federally-mandated collaboration between the three bureaus to provide that.

If you haven’t used Annual Credit Report yet this year, make sure you check your credit report for all three bureaus before December 31st to take advantage of the free, government-mandated credit reports you’re entitled to.

Factors that make up your credit score

Some things hurt your credit score more than others; missing a payment, for example, will hurt your score much more than a hard credit inquiry. Before trying to improve your credit score, you need to know the factors that make up your score and which ones are most important.

1. Payment history (35%)

Payment history is the most important factor in determining your credit score. Even one missed payment can sharply reduce your credit score (by as much as 100 points), so it’s important to make all your payments on-time. If you find yourself unable to make a payment one month, talk to your lender. They’ll often work with you to ensure you don’t get penalized for missing a payment. They’d much rather accept a late payment than have you default on your loan or line of credit.

2. Credit utilization (30%)

Credit utilization is the amount of available credit that you’re actually using. For example, if you only have one line of credit with a limit of $10,000 and you are using $5,000, your credit utilization is 50%. Credit utilization is heavily weighted into your credit score, but it can quickly change. A late payment can stay on your credit report for seven years, but credit utilization can be changed instantly by paying off your lines of credit. It’s best to keep your credit utilization as low as possible, and you should never carry balances on your credit cards unless you have to.

3. Length of credit history (15%)

Length of credit history factors into your credit score, but it isn’t very heavily weighted. Closing old accounts can lower your length of credit history, as can opening new accounts. 

4. Credit inquiries (10%)

Whenever you apply for a new line of credit, they check your credit report and you receive either a soft or hard credit inquiry. You may get a soft credit inquiry when applying for a credit limit increase, and you’ll get a hard credit inquiry when applying for a new line of credit. Lenders don’t want to see a lot of hard credit inquiries because it means you’ve been recently applying for lines of credit, which could be a sign that you’ve come on hard times. Hard inquiries stay on your credit report for two years but only affect your score for one year, so racking up several hard inquiries isn’t a big deal.

5. Mix of credit (10%)

Card issuers want to see that you can responsibly use and manage multiple lines of credit. Someone who only has one credit card will have a lower credit score than someone that has student loans, a credit card, and a mortgage, all other factors being equal. This may seem backwards, but using credit responsibly can be a juggling act, and lenders want to make sure you can successfully juggle.

How good is your score?

Of course, just knowing your credit score doesn’t tell you anything: you need to know the scale and ranges for good credit scores and poor credit scores. Credit scores range from 300-850, with higher scores being better. Here’s a more detailed breakdown.

Poor (300-629)

If you’re credit score is in the ‘Poor’ range, you may have missed some payments or you may not have any credit history at all. When your credit score is poor, you may have trouble getting approved for loans or new lines of credit.

Fair (630-689)

When your credit score is fair, you’ll be able to get approved for loans and credit cards with less strict requirements, but you typically won’t be able to get great interest rates.

Good (690-719)

You’ve shown you can responsibly use credit, but your accounts may not be that old, or you may be utilizing a little bit more of your credit than you should be. You may not get approved for the best credit cards or get the best interest rates, but lenders will typically give you competitive rates and you’ll be approved for most lines of credit.

Excellent (720-850)

Once your credit score is excellent, you’ll qualify for almost every credit card offer and have no trouble opening new lines of credit with competitive interest rates. At a certain point, your credit score doesn’t matter anymore; lenders often look at someone with an 820 score and someone with an 840 score exactly the same. 

How to improve your score

There isn’t any secret to improving your credit score. You need to make sure every payment is made on time, that you aren’t using too much of your available balance, that you don’t open too many new accounts in a short period of time, and it’s best to have a mix of different credit accounts.

If you’ve made mistakes in the past, like missing a payment, the only thing that can erase that is time. Unfortunately for missed payments, they can take seven years to fall off your credit report. The best way to improve your credit score is to be diligent. Keep an eye on your report, make sure you’re doing everything right, and your credit score will inevitably improve.

Share Time & Money

Thanks so much for subscribing to my newsletter! If you’re new, take a minute to dig through the archives for posts like How Do I Start Investing?How to Prioritize Your Financial Goals, or How to Pay Off Debt.

If you’re enjoying the newsletter, forward it to someone you think may enjoy it too! They can subscribe by clicking the handy button below.