Credit scores are more or less calculated the same way across the three major credit bureaus. The 5 factors they look at are listed below in order of their importance:

• Payment History (35%)
  • Payment history tracks if you pay your bills on time.
  • This is the most important factor, accounting for 35% of your credit score.
  • The more frequently you miss payments the worse your score will be. The later the payment is, the worse.
  • Larger missed bills such as $1000 hurt your score more than smaller missed bills such as $100.
  • Recent missed bills hurt your score much more than missed bills from years ago. You are ‘forgiven’ over time.
  • Bankruptcies, foreclosures, accounts in collections, and delinquencies are all grouped into this category. All of these situations will greatly damage your credit score and should be avoided at all cost. An account in collections will do serious harm to your report and takes 7 years to be taken off the record.
• Credit Utilization (30%)
  • Credit utilization (CU) is a ratio that tracks how much credit you are using vs. your credit limit. For instance, if you have 4 credit cards that all have a credit limit of $2500, then you have an overall credit limit of $10,000. Now, if you have a balance of $2500 spread out between all 4 cards, then your credit utilization would be 25% ($2500/$10,000). On the other hand, if all of your cards are maxed out then your credit utilization would be 100%.
  • Spreading out costs between cards will help your credit. Take the previous scenario: 4 cards with $625 on each is better than 1 maxed out card at $2500, even if the other 3 cards have no balance. Your overall CU is still 25%, but having a 100% CU on one credit card is much worse than a 25% CU on 4 different cards.
  • Your CU should ideally be below 30%, but the lower the better. Lenders like to see their customers are responsible with their money and not maxing out cards.
  • This only includes revolving credit, such as credit cards. Mortgages, student loans, and auto loans do not count towards your CU.
• Length of Credit History (15%)
  • Length of credit history tracks how long you have been using credit.
  • This is an average of all open accounts. For example, say you’ve had a car loan for 2 years, a credit card for 6 years, and student loans for 7 years. Your length of credit history would be 5 years (15/3).
  • The longer the better, since this allows lenders to see your spending habits over a long period. Who would you trust more with your money, a complete stranger or a friend you’ve known for 10 years?
• New Credit Activity/Applications (10%)
  • New credit activity tracks the number of times you have applied for a new line of credit within the last year. These are technically on your record for 2 years, but only negatively impact your score for 1. The lower this number is the better.
  • Lots of applications for new credit lines will lower your credit score, though multiple applications for the same type of loan (i.e. shopping around for a mortgage) within a 15-day period will only count as 1 inquiry.
• Credit Mix (10%)
  • Credit mix tracks the diversity of your credit lines.
  • Lenders like to see that you have different types of credit, and that you are able to handle the responsibility of paying them off simultaneously. Having more than just a credit card shows that you have experience dealing with different types of loans, making you more attractive as a borrower.

HOW TO IMPROVE YOUR CREDIT SCORE

1) Run your credit report and check your score.

First off, in order to fix something, you need to understand what the problem is. You can run your report for free and see exactly what is bringing your score down on a handful of different sites. My favorite is CreditKarma.com. I highly recommend creating an account with them. Its super quick, free, and easy to do. Once in, run your report and glance it over. You may find errors which you can then dispute with the credit agencies, potentially having them removed and boosting your score.

2) Pay all of your bills on time. Seriously, just do it.

As mentioned above, the two biggest factors in determining your score are your payment history and credit utilization. Therefore, if there is anywhere to focus your efforts, it’s here. Keeping your credit utilization low and being able to pay your bills on time are directly corelated. If you’re way over your head in debt and literally can’t afford to pay your bills, then you will be hit with both barrels. Fixing the problem boils down to this: live below your means and aggressively cut expenses. This deserves its own blog post one day, but this means stop eating out so often (my personal weakness), cut out cable and all the streaming services, maybe don’t take that vacation, delay gratification. I understand people get ingrained in their lifestyles and scaling back is not easy. But like everything else, you’ll get used to it and it will help you in the long run. Doing this will lower your credit utilization and allow you to make more payments on time. The first thing I do every single payday is go online and make the minimum payment (and then some) on all of my credit cards. I also setup autopayments anywhere possible. For those which I can’t I have calendar reminders set up to make sure I never miss a payment. These are all tactics you can use.

3) Never close accounts. In fact, open more.

Closing accounts will lower your overall credit limit, increasing your credit utilization. If you have 2 credit cards each with a $3000 limit and decide to close 1 that you never use, you will slash your overall credit limit in half, which would double your credit utilization. What I did was open up multiple credit cards with different perks, about 1 per year. This has skyrocketed my credit limit and boosted my score significantly over the previous years. But again, you have to be responsible here! Do not go around spending money you don’t have. Just because you could doesn’t mean you should. Also, I only have about 4 credit cards, I’m not advocating to open up dozens of accounts here.

4) Secured credit cards.

This is a vehicle you can use if your credit is very poor and banks are refusing to give you a credit card. A secured credit card operates the same way as a regular credit card, but when you open the account you have to deposit a certain amount of money, typically the amount of the credit limit which they will give you. This ensures that if you default on your payments, they can close your account and withhold your deposit. Its less risk for them and allows you to build your credit back up. Just make sure you are making your payments on time and keeping your balance low.

5) Balance transfer cards.

These are one of my favorite hacks in the credit world. Balance transfer cards allow you to transfer your balance from other credit cards to this new one, and typically have 0% APR for 12-18 months. This can save you hundreds to thousands of dollars in that time frame if you are currently paying very high interest rates on high-balance cards. Transferring high balances to a 0% interest card will allow you to pay off more of the principal each month rather than paying down interest owed.  The only caveat here is that these cards usually require a high credit score to be approved, so this may be more of an option for people trying to get from 700 to 800 than 500 to 600. Either way it’s definitely worth looking into!

6) Piggybacking.

This one is huge. If you can it to work, that is. Piggybacking is when you have someone with excellent credit (likely a family member or very close friend) add you as an authorized user to one of their credit accounts with a great history of payments and low credit utilization. If done right this can significantly boost your score almost immediately. The entire history, CU, and age of credit will be reflected on your report.

A few things to take away from this:

• This does not hurt the other persons credit. Your score and your history remain separate from theirs.
• Do not actually use the line of credit you are being added to. Communicate this from the very start. The owner is more likely to agree to this if they know you won’t have access to their accounts. If you did, you might rack up a hefty bill and get them into hot water.
• This has been a grey area in recent years and credit unions have begun to crack down on piggybacking. The rules are foggy and could change by the time you read this so please do your own bit of research if you plan to take this approach.

7) Start early.

Your length of credit history accounts for 15% of your score, so it’s advisable to get started early. It may be too late for you to capitalize on this, but you can always pass this info on to your kids, nieces, and nephews. When starting early its best to open a credit card to put small expenses on and then pay it off every month on time. This will build your length of credit history and payment history at the same time.

CONCLUSION

Your credit score reflects your creditworthiness/financial responsibility and is used by lenders to decide if they will lend you money, and at what interest rate. It may not be important to you right now, but you’re backing yourself into a corner if you wait to understand it until you need to. Over the course of your life a good credit score can literally save you thousands or even hundreds of thousands of dollars. The main factors on which its calculated are: Payment history, credit utilization, length of credit history, new credit activity, and credit mix. There are a number of ways you can work to improve your credit score (listed above), but the absolute best way is to make sure all of your bills are paid on time and that you’re not maxing out your credit cards.

In the end, your credit score just tracks how responsible you are with money, so please everyone, just be responsible and don’t go slinging your borrowed money everywhere. If you have any questions or think I missed something or got something wrong, please leave a comment and I’ll get back to you.