Many people confuse credit scores with a credit report. A credit score predicts how likely you are to pay back a loan on time. Companies use a mathematical formula called a scoring model to create your credit score from the information in your credit report. These scores usually range from 300 to 850. Banks, credit card companies, and lenders may use different credit scores to make decisions about offering you credit. Two of the most commonly used credit scores are FICO (calculated using formulas from Fair Isaac Corporation) and VantageScore (calculated using formulas from VantageScore Solutions). FICO shares this information with the public about what goes into its scores.
The payment history tracks whether you’re paying your bills on time. The amounts owed tracks what you owe, including debts that you are paying down over time. The length of credit history tracks how long you’ve had credit accounts. The longer the history, the more positive effect on your scores. New credit is tracked by measuring the credit inquiries about you made by creditors and others. Lastly, it’s considered a good thing to have a mix of credit, such as a mortgage, an auto loan, and not too many credit cards. These are some guidelines that can help you build a strong credit score.
- Pay your loans on time, every time. One way to make sure your payments are on time is to set up automatic payments or set up electronic reminders. If you’ve missed payments, get current and stay current.
- Don’t get close to your credit limit. Credit scoring models look at how close you are to being “maxed out,” keep your balances low compared to your total credit limit. If you close some credit card accounts and put most or all of your credit card balances onto one card, it may hurt your credit score if this means that you are using a high percentage of your total credit limit. Experts advise keeping your use of credit at no more than 30 percent of your total credit limit. Paying off the balance each month helps get you the best scores.
- Long credit history will help your score. The more experience your credit report shows with paying your loans on time, the more information there is to determine whether you are a good credit recipient.
- Only apply for credit that you need. Credit scoring formulas look at your recent credit activity as a signal of your need for credit. If you apply for a lot of credit over a short period of time, it may appear to lenders that your economic circumstances have changed negatively.
- Fact-check your credit reports. If you spot suspected errors, dispute them. If you have old credit card accounts you are not using, keep an eye on them to make sure that an identity thief is not using them.