Managing Your Credit Score

by Gary Foreman

Managing Your Credit Score photo

Managing your credit score should be a part of managing your finances. Learn how your credit score is calculated and what you can to do improve it – and not harm it.

Your credit score affects how much interest you pay when you borrow money. It can also affect whether you get an apartment or job and how much you pay for insurance. So let’s take a look at what makes up your credit score and how you can manage your credit score to keep it as high as you can.

A few credit score basics

Your credit score is a number between 300 and 850. The higher the number, the better your score. A score of 720 or better is considered excellent.

There are three companies that provide the majority of credit scores. And one of them, the Fair-Isaacs Company, is the industry leader. In fact, its acronym (FICO) has come to mean “credit score” to many people.

Fair-Isaacs does not divulge exactly how they calculate credit scores. But they do give an idea of how it works. Five categories each contribute a portion to the total score.

What lenders look for in a credit score

Having a long credit history without late payments counts for 35% of the score. Lenders like loaning money to people who have a pattern of meeting their obligations. The best thing you can do for your credit score is to make timely payments each month and keep doing that month after month.

Lenders also like borrowers who haven’t tapped every source of money available to them. The ratio of how much you owe compared to how much you could borrow is worth 30%.

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How credit limits affect your credit score

A decrease or an increase in your credit limits will affect your credit score but how much or how little depends on your financial situation.

Your score will suffer if you already carry balances that total 30% or more of the credit available to you. So if you carry a hefty balance, reducing the available credit will lower your ratio and hurt your score.

So if you’re anywhere near the limit, you don’t want to change it. If you’re not sure of your balance or the credit limit, both will be on your account statement.

On the other hand, if you carry a small balance, reducing the credit limit could improve your score. That’s because potential lenders know that you’re limited as to how much you could go out and charge.

You can also lower your credit used vs. credit available ratio by reducing the amount you owe. One of the quickest ways to improve your score is to pay down credit card balances. If you’re not sure of which account to reduce first, start with the accounts that are closest to their limits.

How many credit accounts should you have?

An additional 15% of your credit score is based on how long your oldest account has been open and the average age of all of your accounts. If you’re trying to decide whether to close an account, it will depend on the account. Keep the oldest ones open.

Newer accounts can be closed. In fact, reducing the number of accounts and the amount of available credit is good as long as you don’t dramatically increase the proportion of available credit that’s already being used.

You can have too many accounts. Try to limit yourself to five accounts. If you have more, begin closing the newer, less used accounts.

The amount of new credit you’ve recently received is worth 10%. Adding a bunch of new accounts will reduce your score. They leave the impression that you’re desperate for credit, especially if you’re in your 20s with a relatively short credit history. Regularly accepting new cards just because they’re available to you is a good way to reduce your score.

How credit inquiries affect your credit score

Inquiries about your credit can also affect this section. Requests for “pre-approved” credit offers do not count against you. Also, if you make more than one application in a two-week period, it only counts once. That’s useful if you’re shopping for a car loan or mortgage.

Be careful who sends in a query about your credit. Applying for a new credit card once a month to test the waters is a bad idea. Occasionally, someone will ask if they can check your credit, like when you’re negotiating for a car. They’ll make it sound unimportant. But, it’s not. Every time someone checks your credit, your score takes a small hit. That can add up over time.

The types of credit accounts you have matter a little

Finally, the types of credit in use count for 10%. Your score will improve if you’ve successfully paid off a variety of lenders. Don’t borrow just so you can say that you’ve paid off a car loan. But, your credit score will be higher if you take out an auto loan rather than just add to your homeowner’s line of credit.

We all should be concerned with our credit score. More and more things will be tied to it in the future.

Reviewed September 2020

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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