How to Improve Your Credit Score

What are Credit Scores?

• A credit score is a number (between 300-850) that is used by lenders to decide if you qualify for credit and how likely you are to repay debt.

• A higher credit score indicates that the applicant is less risky and is more likely to be approved for credit. Consumers with high credit scores are also likely to qualify for credit at lower interest rates.

• Credit data is collected by the three major credit bureaus (Equifax, Experian, and TransUnion) sent to them by creditors. These credit bureaus calculate credit scores based on information such as the timeliness of creditors bill paying and how much of their credit lines are utilized.

• The leading Credit Score company is called FICO. They take credit scores from the three credit bureaus and enter them into their proprietary models to come up with their FICO score. According to Experian, the average US FICO score is 714.

‍

How Your Credit Score Is Calculated

The largest component of Credit Score, which is mostly controllable by the consumer, is Credit Utilization (30% of overall score).

‍

Average FICO Score by Generation & FICO Distribution

As shown in the left chart, older generations of Americans tend to have higher FICO scores. This trend is influenced by older age groups having longer credit histories. The right chart shows the breakdown of FICO scores by range. The overall average FICO score is 714, but 23% have achieved the highest FICO scores (800+).

‍

Ways to Improve Your Credit Score

• Try to maintain your credit utilization ratio at 30% or lower. This can be done by establishing credit lines and not using them fully. Also avoid closing older accounts. Credit Usage accounts for 30% of overall FICO weighting. This is the highest weighted FICO variable that is somewhat controllable.

• Establish credit early, as length of credit history accounts for 15% of overall FICO weighting.

• Pay bills on time and paydown balances quickly. Credit history accounts for the most important (35%) of overall FICO weighting.

• Minimize the number of credit inquiries (credit checks) and avoid opening too many accounts at once. New credit accounts for 10% of overall FICO weighting.

• The FICO model favors the consumer that has a mix of credit lines. That is, personal lines, auto debt, credit cards, and/or mortgages. This is also weighted at 10% by FICO.

• It is also important to monitor your credit report periodically. This is to insure that there are no obvious mistakes, and the reported information is accurate.

‍

“A man who pays his debts on time, is soon forgotten”. – Oscar Wilde

‍