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Understanding Credit Scores and How to Improve Them

Understanding Credit Scores and How to Improve Them

By Anastasia Taber, CFP®

Credit scores provide lenders with a snapshot of your history of repaying debts. A low credit score can jeopardize your chances of securing a loan, mortgage, or even renting an apartment. Understanding how credit scores are calculated can help you understand your own score as well as how to improve it—to get you closer to your ideal financial future.

How Are Credit Scores Calculated?

Consumer credit scores are usually reported using the Fair Isaac Corporation (FICO) scoring model, which measures consumer credit on a scale ranging from 300 to 850. FICO doesn’t actually calculate your score directly. Instead, it provides software to each of the three major credit bureaus (Equifax, Experian, and TransUnion) to calculate your score.

According to the Consumer Financial Protection Bureau, since 2011, FICO has used over 60 different scoring models, so there’s no absolute formula. However, credit scores reflect a constellation of financial behavior, each having its own “weight” in your final score:

  • Paying bills on time (35%)

  • Credit utilization (30%)

  • Length of credit history (15%)

  • Credit mix (10%)

  • New credit (10%)

There are multiple ways to work on your credit score, but some methods will have more of an impact than others.

Ways to Improve Your Credit Score

What is a good credit score? Each of the three credit bureaus will permit you to check your credit report for free once each year. Here’s how credit scores are commonly regarded:

  • 800 and Above: Excellent

  • 740-799: Very good

  • 670-739: Good

  • 580-669: Fair

  • 579 and Below: Poor

If your credit score isn’t where you’d like it to be, don’t panic. Credit scores can be improved by following some simple strategies.

Pay Your Bills on Time

On-time bill payment is the biggest contributor to your credit score. Commit to paying your bills on time every time. Where possible, use online bill pay so you automatically pay your bills at the same time each month. Or set reminders on your phone or e-calendar so you never miss a payment.

Keep Your Credit Card Balance Low

Credit scores are also influenced by your credit utilization ratio, which refers to how much of your credit limit you use. To avoid impacting your credit score, aim for a ratio of 30% or less. So if your credit limit is $5,000, you should keep your balance below $1,500. If this proves restrictive, you can always request that your credit card issuer raise your credit limit.

Be Careful When Closing Credit Cards

Some consumers think that if they close a credit card, it can improve their credit. But remember: the length of your credit history impacts your score. If you close your oldest credit card, it can shorten your total credit history, which can drop your score.

Limit New Credit Card Applications

Each time you apply for a credit card or certain types of loans (auto loans, mortgage), it can cause a temporary dip in your credit score. Applying for multiple credit cards or loans can increase this drop. 

If you’re shopping for a house and are seeking pre-approval from multiple lenders, try to keep your applications within the same 30-day window to minimize the hit on your credit score.

Check for Errors on Your Credit Report

Check your credit scores from each of the three credit bureaus. Review your credit report for any errors or inconsistencies. If you discover any mistakes, report them to the credit bureau immediately. You may find that an error is artificially lowering your score. Act fast, since it can still take time for errors to completely disappear from your credit history.

Get Started Today!

Consumer credit scores are just one part of your financial picture. At TABER Asset Management, we can help you develop greater financial literacy and create a plan that aligns with your future goals. 

Ready to get started? Schedule a 15-minute intro phone call online or reach out to us at 515-557-1860 or We look forward to speaking with you!

Interested in more info on the evolution of credit lending? Listen to this podcast episode in which I offer advice and information for those with credit or looking to start.

About Anastasia

Anastasia Taber is an Associate Advisor and leads the financial planning services division at TABER Asset Management, an independent, fiduciary wealth management firm, in Alexandria, Virginia, that strives to do one thing well: manage their clients’ money by creating wealth, building wealth, growing income, and preserving capital so they can experience financial freedom. Anastasia is a CERTIFIED FINANCIAL PLANNER™ and has a Bachelor of Arts in English from Georgetown University. She has years of experience working for one of the largest REITS in the U.S., as well as in property management and accounting at a global law firm in Washington, D.C. Anastasia is passionate about exceeding her clients’ expectations and building caring, long-term relationships based on trust. She is known for being detail-oriented and committed to excellence in her work. Anastasia is a co-host on the Creating Wealth podcast. To learn more about Anastasia, connect with her on LinkedIn.

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