Finance 101: Credit Score Basics

Time To Read 3 MIN READ

With just one number, your credit score makes a substantial first impression on lenders because it provides a snapshot of how you've handled debt in the past. The Fair Isaac Corporation score, known as a FICO score, which is one of the most widely used and best known credit scores, ranges from 300 to 850, with a good score being at least 740.

Factors Affecting Your Score

The credit scoring algorithm used by the Fair Isaac Corporation looks at five factors: your payment history, how much you owe, how long you've had credit, how much new credit you've recently applied for and the various kinds of credit you've used. Your payment history counts the most: it's weighted to provide 35 percent of your score. The amounts you owe, which include how your credit card balances compare to your available credit limits is the second most heavily weighted factor, and counts for 30 percent of your score. How long you've had credit counts for 15 percent and the final 20 percent is divided evenly between credit you've applied for recently and the different types of credit, such as installment loans and revolving lines of credit, you've had experience with.

Significant When Borrowing Money

Your credit score is one of the most significant factors lenders take into consideration when you want to borrow money. "Anytime that you finance something like a car or a house, the lender will look at your credit score to determine if you are somebody who is expected to pay them back in a timely manner," says Katie Brewer, certified financial planner with Your Richest Life. Landlords, utilities companies, and even potential employers can take your credit history into consideration.

Checking Your Credit Report

Improving your credit score starts with checking your credit report. "If there is anything on your credit report that is not accurate, take steps to contact the credit bureau or lender that reported it and have it corrected," says Brewer. In addition, Brewer recommends, "Don't close your oldest credit card. You get extra points on your credit score for the length of time that your credit cards have been opened. If you are somebody who occasionally makes late payments, make it a goal to make every single payment early or on time for the next few months. To make this easier on yourself, set up autopay for your bills and credit cards."

Improving Your Score

If you've had credit issues in the past, your credit score isn't permanently damaged. "If you have a history of bad credit, time is your biggest ally in helping to correct your credit score," says Brewer. "Make sure from now on that your credit history has nothing but positives in it." How long it takes to recover, however, depends on what is in your credit report. "If you have filed a bankruptcy, or if you have had a house foreclosed, it takes quite a few years for this to fall off of your credit record," says Brewer. "If you have had some bad debt, it could make sense to contact the National Foundation for Credit Counseling to see if they can help you negotiate with the lender in order to take that bad debt off of your credit record after you've paid it off."