What is a good credit score and how can you improve yours?

You’ve probably seen the commercials and heard the jingles, but do you know what a credit score really is or how to earn a good one? Your credit score is a three-digit number that reflects your history of borrowing money and helps lenders (banks and credit card companies) decide whether or not to lend to you or give you a line of credit. This affects your interest costs for credit cards, loans and mortgages and can determine whether you’ll be approved for a loan or financing for a home or car.

Credit score by the numbers

There are different formulas used to calculate credit scores, but the most commonly used one comes from Fair Isaac Corporation. (FICO). FICO scores range from 300 to 850 and are typically broken down in the following categories:

< 600: Poor credit
630-689: Average credit
690-719: Good credit
720-850: Excellent credit

Knowing (and improving) your score

A number of companies offer FICO scores online for a small fee or registration, and some lenders and credit card companies are also adding the metric to monthly statements for their customers. In addition, the Fair Credit Reporting Act allows consumers to request a free copy of their credit report from each of the three major credit reporting agencies once a year (Equifax, Experian and Trans Union). You can get your annual report online or by calling 1-877-322-8228. If you find that your score could use improving, keep the following in mind:

  • To earn a good credit score, you need to use credit, and use it responsibly. This means opening a line of credit.
  • Keep your balances low. One aspect of the credit score calculation is existing debt compared to available credit. While it’s tempting to spend to the maximum amount of credit you have, that’s a habit that will lower your credit score. Maxing out a credit card could deduct 45 points or more from your score, even if it’s a small amount. It’s better to have used $500 on a $1,500-limit card than $299 on a $300 card.
  • If you’ve paid a card off, think twice before closing the account. Owing zero dollars out of an available line of credit will boost your score!
  • Pay on time. Late payments will count against your score, so sign up for auto-pay if it’s an option to make sure you don’t miss anything.
  • Keep an eye on bills. If it’s something that you don’t pay regularly—a car repair or a hospital visit—make sure you receive and pay the bill. If you miss a payment or the bill gets taken to collections, you’ll see a dip in your credit score.

Once you’ve figured out your credit score situation, check it regularly. This is a great way to make sure there are no mistakes or evidence of identity theft/fraud and stay motivated to keep a good score!