Quick Guide to Your Credit Score

Have you ever wondered how your credit score is determined and what you can do to influence it?  Although the process may seem to be a bit of smoke and mirrors, it is important that you pay attention to your score as it is key to obtaining loans at the lowest interest rates, thus saving you money.

To begin, let’s review some of the basics.  Your credit score is a measure of your past ability to make payments on time and manage your credit. It is designed to help lenders determine how likely you are to pay back your loan. The number is calculated using a formula created by Fair Isaac Corporation, which is why it is commonly referred to as your FICO score. FICO scores range from 300 to 850.  In 2020 the average FICO score was 710.

But what does this number really mean?  Here is a rough guide to credit scores:

800 to 849: Fico scores in this range are considered exceptional and will open the door to your best loan offers at the lowest cost.  About 21% of Americans are in this range.

740 to 799: Credit scores in this range are classified as very good.  Although you would be a good candidate to get a loan, the interest rates might be slightly higher.  25% of Americans fall into this category.

670 to 739: Fico scores in this range are considered good. Borrowers in this range would be paying more for their money than the best-advertised rates.  Approximately 21% of Americans have a score in this range.

580 to 669: A score in this range would be classified as a fair credit risk.  With a below-average credit score, your options will be reduced, and you will pay a premium on your loan.  17% of Americans have a fair credit rating.

Below 579: A credit score under 579 puts you in the category of a very poor borrower. Loans will likely be denied or at extremely high-interest rates to compensate the lender for the additional risk.  Only about 16% of the population falls into this category.


Your credit score can also affect the rate you pay for car insurance. People with low credit scores are statistically more likely to make accident claims, and as a result, many insurance companies take this into account when they set your premiums.

If you’re trying to build — or maintain — your credit, it helps to monitor it regularly, along with your credit reports, to check your progress and look for areas you need to work on.  You can obtain your credit reports for free from each of the three major credit reporting agencies (Equifax, Experian, TransUnion) once a year through AnnualCreditReport.com.

Remember that everyone has their own credit report, so you and your spouse should BOTH be monitoring your credit. While joint accounts will appear on both, there can be differences, so you both should get your reports and review them.

Now that you know what your credit score is, what can be done to improve it?  Your number is based on more than 100 proprietary “Risk Factors” that FICO has determined may influence your creditworthiness.  To raise your score, consider the following key areas:

Balances too high:  Keeping a big balance on a credit card can increase your credit utilization ratio, which is the percentage of your credit limit that you use. Together with other measurements of your overall debt, this ratio accounts for about 30% of your credit score.

The ratio is calculated using the end-of-month balance that appears on your bill, meaning that your score can suffer even if you pay off your balance every month. To keep your debt utilization ratio in check it is recommended that you use less than a third of your credit limit.  Tip: To obtain the best FICO scores, keep this under 10%. 

Closing Credit Cards: This is counter-intuitive but closing a credit card account can hurt your credit because it lowers the amount of credit you have available to you – which can then hurt your debt utilization ratio.

Tip: Take cards that you are not using out of your wallet but do not close the account. 

Too New: The length of your credit history is also factored into your credit score, so it is wise to open a credit card when you graduate to begin to establish a payment history.  Remember, you do not need to use the card often, and you should pay off the balance each month.

Tip: Good practice is to put one recurring bill on the card (such as your phone bill) and then automate the payment.  

Only Credit Card Debt: If you have several credit cards in your name, but no loans, your credit might suffer. Credit scoring systems reward consumers who diversify and have different types of accounts in their name. Plus, revolving debts, which include credit cards, are viewed less favorably than loans. For example, a consumer with a couple of credit cards, a mortgage loan, and an auto loan will likely have a higher FICO score than a consumer who only has a few credit cards, even though the former likely carries more debt.

Tip: If you are considering buying a new car and can afford the payments, taking out a car loan could boost your score.   

Delinquency and Late Payments: Your payment history is one of the biggest factors that lenders look at and makes up approximately 35% of your FICO score. Late payments on credit cards, student loans, mortgages, or even doctor’s bills can all bring down your score if the company reports it to the credit bureaus.  Have unpaid parking tickets or fines?  These may be reported, too.

Tip: If you run into difficulties paying a bill, be proactive and reach out to your lender.  Most will work out a payment plan that will keep your credit rating in tack while you pay down your debt. 

improve credit score

Defaulting: The most obvious credit blunder is defaulting on a loan or credit card. The biggest hits come from declaring bankruptcy or foreclosing on a home, which can easily slice 100 points or more from a credit score.

Tip: Bankruptcies stay on your credit report for 7- 10 years depending on the type of filing (Chapter 13 vs Chapter 7).  This should be viewed as a last recourse. 

Opening too many credit lines: While having some credit is good for your score, there is such a thing as too much. Every time you apply for a loan or credit card, the lender makes an inquiry into your credit history, which usually knocks off several points from your credit score.

Tip: Keep the number of credit cards to a minimum and avoid store credit card promotions that can hurt your credit.

Co-signing: It is tempting to help a friend or relative by co-signing a loan when they cannot qualify on their own, but it is a huge risk to take. By co-signing, you are assuming equal responsibility for the amount owed, meaning any late payments or defaults will show up on your credit report and your score will suffer accordingly. You could also end up facing collection action or even lawsuits.

Tip: Just say no.