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Understanding Your Credit Score

Factors contributing to someone's credit score

Your credit score, a number that rates your creditworthiness, can open or close financial doors. Lenders of all kinds use it to determine whether to lend you money and, if so, whether to give you the most favorable rates. You typically need at least a decent credit score of 700 or higher to qualify for credit card offers.

The calculations that determine credit scores, however, are complex, factoring in a range of different ways you’ve dealt with your finances in the past. But by understanding what actions factor into your credit score, you can take some steps to improve it.

First, know that your credit score is based on information collected on your credit report by the three major credit bureaus — Experian, Equifax and TransUnion. They keep track of what kind of credit accounts or loans you currently have and whether you’re paying your bills on time. You’re entitled to a free copy of each bureau’s report on you annually at

Your credit score is based on a compilation of what’s on your credit report at all three major credit bureaus. The most commonly known and used credit scoring agency is Fair Isaac Corp.’s “FICO” score, which gives consumers a score between 300 and 850. Any score above 700 or so typically means you’re a “good” credit risk and will qualify for most consumer loans and credit cards.

According to Fair Isaac, here’s how your credit score roughly breaks down: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit in use.

So, how does this all translate for you personally? What steps can you take to improve your credit score or keep it strong? Here are five tips:

  1. Always pay bills on time. Much of a credit score — more than a third in FICO’s case — is based on whether payments are made on time. It usually takes seven years for one late payment or a collection to disappear from a credit report.
  2. Reduce credit card balances. Another third (30%) of a FICO score looks at how much a person owes versus their total available credit. The debt-to-available-credit ratio also matters when it comes to available accounts, so don’t think about shifting debt from one account to another as a way to look more responsible. Instead, try to keep low balances while keeping plenty of credit available to you.
  3. Be careful closing old, unused accounts. A 10-year-credit card that is paid off helps establish length of credit history. Are the old accounts getting too unwieldy to manage? Start by closing the newest accounts first.
  4. No sudden moves. This has to do with the 10% “new credit” portion of FICO. Generally, people with a lot of debt will start opening accounts all over the pace in an attempt to shift funds. So as tempting as a 15% discount by opening a new store card be, have some restraint and don’t open new credit lines more than once every few months.
  5. Check your reports. Federal regulations allow a person to get a free annual copy of reports from Experian, Equifax and Transunion reports. These are the same reports a credit score provider will use, and you have the right to challenge credit report information if it is incorrect. Checking the report can also help catch possible identity theft.
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  1. mes53No Gravatar says:

    Red tape that you go through is ridiculous, then the credit bureaus only do the freeze for 90 days. You have to renew again. Thank goodness for the notification from the credit card company that this was even going on.
    Thanks again for this great site. Always learning!

  2. To follow up on mes53, the Identity Theft Resource Center recommends that executors and administrators contact the three major credit reporting bureaus informing them of the death of the card holder. Also, they should request a report from each of the three to find any active credit accounts that need to be closed.

    Also, great post Jim on these little understood factors used in determining credit scores. Thanks for the information.

    1. jblankenshipNo Gravatar says:

      Thanks, Steven – that was actually a guest post from Kelly Spors, from I think it was an excellent article as well!


  3. mes53No Gravatar says:

    People also need to be made aware of identity theft on a deceased person’s name and what you have to go through to put a freeze on a social security number, etc. I dealt with this after my husband died. Not easy to deal with at such a traumatic time.

    1. jblankenshipNo Gravatar says:

      That’s a great point that most folks wouldn’t even think of. Thanks for sharing!


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