Credit Scoring Tools & Techniques

Your credit scores can be an important component of your financial picture. It's an indicator of how worthy you are to potential lenders for credit accounts, and a higher score can save you a lot of money through lowered interest rates. Understanding how credit scores are calculated and learning about techniques and tools for improving your score may be the difference between debt and financial independence.

What Makes Credit Score

It used to be there was only one main credit score, your FICO score, designed by the Fair Isaac Corporation and based on the familiar 300 to 850 scale, with 800 being the best. These days, there are new scores and ranges offered by the major credit reporting bureaus, but your score is still based on the same criteria: (1) payment history, (2) amounts owed, (3) length of credit history, (4) new credit, and (5) types of credit used. Together, your payment history and your amounts owed total about 65 percent of your score, while the other criteria only make up about 10 percent to 15 percent each.

Raising your score

Because the most important criteria determining your credit score is your payment history, to improve your credit score, you need to make at least your minimum payments on all of your open lines of credit every month. If you are unable to make your minimum payments, you should call your lenders and ask them about adjusting payments to stay current.

The second major factor determining your credit score is amounts owed to your creditors. Generally, the less you owe your creditors, the higher your score will be. Make it a point to pay off as much as you can to your lenders each month to lower your debt load and raise your score.

The length of credit history is a third factor in your credit score. The longer your accounts have been open and active, the better the score. To keep your score high, avoid closing your oldest accounts, whether you use them or not.

New credit tends to adversely affect scores. A high proportion of new credit lines to old accounts, or too many recent inquiries on a report can cause a credit score to go down. Limit the number of new accounts you open at a time.

The two main types of credit accounts are revolving accounts, such as credit cards, and installment loans, such as car loans and mortgages. Credit scores typically improve with a balance of these two kinds of credit. Too many credit cards and no installment loans can adversely affect your score.

Tools for Improving Score

A number of companies out there are claiming to improve your credit score with their monitoring services. For some people, especially those who have experienced identity theft or other kinds of fraud appearing on their credit reports, these services might be appropriate, but for the majority of consumers, a free yearly credit report is the only tool necessary for monitoring credit and improving scores. These can be obtained by phone, by mail or online from each of the three major credit reporting bureaus, Equifax, Experian and TransUnion.

A credit report will give you a picture of your credit, and give you the chance to dispute any incorrect entries on your report. Fixing these errors may raise your score. In addition, you have the option to add personal notes to your credit report, which lenders may take into consideration when offering you credit.