Understanding how credit scores work

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question for expert Dear Credit Guy,
Hello. What is the best way to boost your credit score 100 points?
-- John

Answer from expert Dear John,
Credit scores are used by potential creditors to determine your creditworthiness. A good credit score can help you lock down a favorable home loan interest rate and qualify you for the most generous credit card rewards and the lowest APRs. Given that, it is wise to keep your credit score and credit reports in the best shape possible.

A fairly new score has recently come on the scene, the VantageScore. This credit score has a different formulation from the FICO score and was established by the three major credit bureaus. In the past when you received a credit report from one of the bureaus, for example Experian, you would also receive a credit score that was determined by the information contained on your report from just that one bureau. As a result, credit scores varied from each of the three different bureaus because they don't all contain exactly the same information. With the VantageScore, you will receive the same credit score no matter which bureau provides it.

Now that you have some background, let's get to your question. One of the best tools for knowing how to improve your specific score is to purchase your credit score and read the tips and explanation that are included in your score.

Without knowing what is in your credit report, it is difficult for me to tell you the exact steps to take to improve your score by a specific point value. I can, however, give you and my readers some tips on how to improve your credit scores as much as possible.

First I want to break down the different scoring formulas for both FICO and VantageScore so that you will know how taking each of the different suggested steps will affect your scores.

FICO: VantageScore:
35% payment history 40% payment history
30% credit utilization 20% utilization of available credit
15% length of credit history 11% credit balances
10% new credit 21% length and depth of credit history
10% credit mix  5% recently opened credit accounts
  3% available credit

Payment history: Obviously, or maybe not so obviously, making payments on time every time and as agreed is an important aspect of an excellent credit score. If you have some accounts that have been paid late, the negative items will stay on your credit report for seven years, but their credit score impact will lessen over time. Be sure to make all of your payments on time from here on out. I can't stress enough the significance of time.  

Amounts owed, available credit and balances: To improve your score in these areas you will need to have availability to credit, but not have used too much of it. In other words, if you have credit card accounts or a home equity line of credit with a total of $15,000 to $30,000 in available credit, you will want to be carrying balances that total less than $4,500 to $9,000 or 30 percent or less than the amount that is available. Ten percent or less is better, but paying your balances off in full every month is ideal. 

Length and depth of credit: Many people lower their credit scores unintentionally by closing old established accounts that haven't been used in a while. Even though the account is not active, it counts for this component of your score. You want to keep at least one or two of your accounts that have been opened the longest.

New or recent credit: New accounts prove that you are currently creditworthy, but too many of them can give lenders the impression that you're increasinly reliant on credit. Don't open an account that you don't need unless improving your score is necessary to get a better rate on a long-term loan such as a mortgage.

Type of credit: A mixture of installment and revolving accounts is what improves this element of your score. A mortgage loan, car loan and several credit card accounts would be an example of the accounts that would score well. Again, don't go out a buy a car just to improve your score!

Take care of your credit!

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Updated: 12-19-2018