Whether you are just starting out or trying to rebuild, establishing a good credit score is vital to your financial wellbeing. Your credit score can affect many aspects of your life including purchasing a vehicle, renting or buying a home, or even getting a job.

How Your Credit Score Is Determined

Knowing how your credit score is determined can be a valuable tool. The pie chart below shows an average percentage of each category used to determine your score. Each credit bureau may have a slight variation in how they determine your score. 

Score Breakdown

  • Payment history – The easiest thing to do and the easiest thing to mess up is making your payments on time. If you’re not good at remembering when your payments are due, set up automatic payments from your accounts. You can set them up to coincide with your paycheck so you know you will have enough money to cover your payments each month, avoiding overdraft fees. Even one late or missed payment can have a huge impact on your score.
  • Amounts owed – Keep your debt-to-credit ratio low. Racking up big balances may hurt your score. Keep credit card balances at no more than 20% of their individual limits.
  • Length of credit history – The more established your credit the better. It is better to start building credit sooner than later. Also, be careful not to close credit that could largely impact your length of credit history.
  • New credit – Don’t open new accounts too rapidly. This could present a red flag to creditors.
  • Types of credit used – Keep a mix of different types of credit accounts. An abundance of unsecured debt such as credit cards could your hurt score.

Just Starting Out

If you are just beginning to build credit, consider either a small secured loan or a credit card with a low limit.

A secured loan is a loan against funds you already have. Be sure you will not need these funds as the loan will freeze them and they will not be available for withdrawal. Interest rates on secured loans are typically lower than those that are unsecured such as a credit card.

Apply for a low limit or secured credit card. If you know how to use them properly, they can be a valuable asset in building your credit. Plus, they are always good to have in case of an emergency. Once you get your card, use it to make at least one small purchase each month and then pay your bill off each month when you receive it. Be careful not to spend more than you can pay off each month.

Improving Your Credit Score

If you already have credit established but need to boost your score here are a few pointers: 

  • Reduce the amount of debt you owe
  • Don’t close unused cards to boost your score — this could shorten the length of your credit history and affect your debt-to-credit ratio
  • Keep in mind that items stay on your credit report for 7 years.
  • If you are behind on payments, catch them up and stay caught up.

Obtaining a Copy of Your Credit Report

You are entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies, Experian, Equifax, and TransUnion. Since each bureau is a little different you may want to look at each one instead of just one. You can choose to order them all at once or stagger them so you review one every four months. To order your free copies, visit AnnualCreditReport.com or call (877) 322-8228, the only authorized source under federal law.

What to Do if You Find an Error

If you find an error on any of the reports, follow the steps provided by the Federal Trade Commission.

Additional Resources

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