min read

Understanding Your Credit Score

Written by
ABA Foundation
Published on
May 3, 2024
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Credit Score

A person’s credit score is one of thefactors that lenders consider when they extend a line of credit or loan (e.g.,auto loans, mortgage loans or personal loans). Lenders often use the number todetermine rates, terms and risk. FICO and Vantagescore are the most widely usedcredit scores and range between 300 and 850. From a lender’s perspective, ahigher score equates to lower risk, which often translates to more favorablecredit terms and better rates.

The following factors account for aconsumer’s credit score:

  • Payment history – Shows whether or not you pay your bills on     time. A single late payment will be included and can negatively affect     your score. 
  • Credit utilization rate – Measures how much credit you use in     relation to your credit limits. For instance, if you have two credit cards     with a combined limit of 10,000, and a combined balance of 4,000, your     credit utilization ratio is 40%. The lower the ratio, the better your     credit score. 
  • Length of credit history – Having credit for longer has a positive     impact on your credit score. 
  • Type of credit – Accessing different types of credit—such     as mortgage loans, credit cards and student loans—indicates how well you     manage your credit. A more diversified pool of credit is better for your     score. 
  • New credit – Opening a number of new accounts in a     short period of time has a negative effect on your credit score. Lenders     examine how often you apply for credit and look at the number of “hard     inquiries” on your account. When you access your own credit report, it     does not impact your score. 

Improve Your Credit Score

The first step to improving yourcredit score is reviewing your credit report. You can obtain a free copy ofyour report at or 1 (877) 322-8228.Your credit report includes the following information:

  • Credit history – The number and types of credit opened both     active and closed accounts), age of your accounts, your account balances     and payment history.
  • Credit inquiries – How often you have applied for     credit. These “hard inquiries” will show up on your credit report for up     to two years. 
  • Collections – Unpaid or overdue debts, such as     foreclosures, bankruptcies or liens.

Once you access your report, determineif there are any errors. If you find any mistakes, you have a right to disputethe information, and can do so by contacting the three credit reportingbureaus: EquifaxExperianTransUnion.

In addition to correcting anyerroneous data, check what you need to improve. Typically, you will want tofocus on:

  • Payments – Even if you cannot pay off a loan     immediately, always ensure that you make on-time minimum payments.     Consider automatic payments or calendar reminders to make payments on     time. Note that paying off a collection account will not automatically     remove it from your credit report. It will remain for seven years, so it’s     important not to reach that point. 
  • Keeping low balances – Your credit utilization is an important     factor in calculating your score. Lenders prefer seeing rates below 30%,     so do not max out your credit cards. 
  • Applying for new credit only as     needed – Too many hard inquiries     that result from applying for new credit will lower your score. 
  • Maintaining your accounts – Don’t close your credit card accounts even     when you stop using them. If you do, you may hurt your credit score by     unintentionally raising your credit utilization ratio.  Consider the     following scenario where you have two cards with a balance of $3,000 and a     combined credit limit of $10,000.some text
    • Credit Card A – balance of      $3,000 and credit limit of $6,000 
    • Credit Card B – zero balance and      $4,000 credit limit 

When you maintain both cards, you havea credit utilization ratio of 30% ($0+$3,000/($6,000+$4,000). If you close theaccount with $4,000, your credit utilization ratio increases to 50%($3,000/$6,000).

If you need assistance, contact aprofessional credit counselor at the National Foundation for CreditCounseling.


credit: ABA Foundation;

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