Credit Score 101

Most people assume that a credit score only matters when it’s time to purchase a house or car. Nothing could be further from the truth. Your credit score impacts all areas of your life from the interest rates and credit limits on your credit cards to whether you’re extended a job offer or an apartment rental. Your spending and payment history will impact the strength of your credit score. If you can demonstrate a pattern of making timely payments, using less than your credit limit, and maintaining accounts over an extended period of time—your good habits will earn you a higher score.

The Lightbulb Moment

Your FICO (Fair Isaac Corporation) score is calculated based on the following factors: payment history, the amount owed, length of credit history, amount of new credit, and types of credit used. Scores range from 300 to 850—the higher the score, the lower the risk. Efforts to pay down debt will go a long way toward improving your credit score.

Here are five tips to make your goal a reality:

• Focus on paying down your revolving debt (credit cards and department store cards), as it is considered more toxic than installment debt (mortgages, auto loans, student loans, etc.).
• Try to limit your credit utilization (the balance you owe vs. the card’s credit limit) to 30% to avoid becoming overextended.
• Explore different repayment strategies to determine which approach will help you pay down debt in the shortest amount of time at the lowest possible interest rate.
• Consider consolidating your high-interest debt to lower your interest payments and reduce the number of credit cards you carry.
• Take proactive steps to create a budget, get your spending under control, and avoid taking on any additional debt.

Build for the Future

If you’re just starting, or if you have avoided loan products altogether, your goal should be to build credit. Establishing one account and having it open for six months or longer should be enough to earn a FICO score.

In recent years, lenders have begun using new scoring systems that take into consideration how consumers manage their saving and checking accounts as well as their rent or utility payments. This alternative scoring allows those who demonstrate good money management practices to benefit from a credit score boost.

Stay in the Loop

Since your FICO score could be negatively impacted by errors on your credit report or potential identify theft, it is important to review it on an annual basis and take corrective action if you see anything suspicious or worrisome. By law, you are entitled to free copies of your credit report once a year from each of the three major credit bureaus (Equifax, Experian, and TransUnion) by visiting annualcreditreport.com.

For more information, explore the Credit Scores and Reports module on Your Financial Best.