Everything You Need to Know About Your Credit Score

There are a few numbers in your life that you’ll take with you through life: your birthdate, your social security number, and your credit score. All three of these are considered on every loan application you’ll ever submit.

The History of the Credit Score

The modern U.S. credit score system dates back to the 1950s when Bill Fair and Earl Isaac created an automated scoring system that would eventually be adopted as the FICO Credit Score. In 1970, the Fair Credit Reporting Act created a regulated system about what information would be collected and reported, and how long it would be used to impact a credit score.

This system was designed to replace the previous method of lending: character-based decision-making. If you had a positive credit history, you could still get denied at a bank if the banker didn’t like you, which resulted in discriminatory lending and barriers to funding for many.

While today’s credit scoring system isn’t perfect, it’s a vast improvement from the way things used to work.

Five Factors of Credit

Building credit can be tricky but if you understand the five factors that contribute to your score, you can better understand ways to improve it.

1. Payment History – Do you consistently pay your bills on time? This accounts for 35% of your credit score and is one of the best ways to make sure your credit remains in good standing. Even paying your Netflix subscription on time can contribute. So if you’re starting with nothing – every little bit helps.
2. Outstanding Credit Balances – The amount of money you have on credit impacts 30% of your credit score. It’s important to keep your credit to debt ratio low so you’re less of a liability when lenders are reviewing your application.
3. Credit History – This accounts for 15% of your credit score. Your credit history includes the length of time you’ve had a line of credit. The longer, the better. Even if you’re not using a credit card anymore, you may want to keep the account open to extend your credit history.
4. Type of Credit – 10% of your credit score is impacted by the type of credit you have. If you have a mix of loans and credit cards, you’ll likely score hire than if you have debt from credit cards only. Most adults are likely to have a credit card, student loan, and/or car loan.
5. Inquiries – The last 10% of your credit score is based on inquiries over a six-month period. When applying for credit, many lenders will pull a “hard inquiry” that can cost between 2 and 25 points on your score.

How to Improve Your Credit Score

Now that you know the ins and outs of your credit scores, you should be able to identify ways to improve your score.

If your payment history is lacking, do your best to pay your bills in full and on time. If you can take it a step further and pay off your credit card balance each month, that will help with your outstanding balances!

You can also diversify your sources of credit. Maybe you only have a car loan but are planning to purchase a home in the future. Find a credit card that works for your finances to diversify your source of credit, increasing your type of credit score. In addition, keep an eye on your inquiries. Don’t apply for too many things too quickly or it could backfire!

Bonus tip: You can fix errors on your credit score! We recommend that you monitor your score and check your full report whenever you see a major change. Errors happen all the time – maybe someone got a hold of your credit card or an old credit score issue should have rolled off – there is an option to report an error on the websites of the major credit bureaus.

Keep Your Eyes on the Prize

Building and rebuilding credit can seem like a daunting task, but making small decisions every day can lead to big wins later on. If you’re unsure how to build up your credit history for future loan applications, talk to a banker at your local Highlands Community Bank branch for more information!