What is a Credit Score & How to Improve It
A credit score is a number that potential lenders will use to determine whether they should lend you money, how much, and at what interest rate.
Your credit score, also called a FICO score, is an actual number, between 300 and 850. The higher the number, the better: a score of 740 to 799 is considered very good, though the average is closer to 700. FICO is an acronym for Fair Isaac & Co., the company that is responsible for tabulating your credit score.
Each of the three main credit agencies – Experian, Equifax, and TransUnion - have a score for you based on your credit report at that individual agency. Each agency has more than 200 million files on people who have a credit history because they have used credit, and 4.5 billion are updated in those files every month. The agencies tend to have different information on the people they track, which means your credit report and score will vary from agency to agency.
Those scores are what potential creditors, landlords, employers, and insurers look at for an instant summarization on your creditworthiness.
That’s important because lenders believe that people who are creditworthy will pay back what they owe. That’s why better credit reports and higher credit scores make it easier, and cheaper, to borrow. It also makes it easier to rent an apartment, buy a house, get insurance, and a number of other day-to-day essentials.
Sources of Data
Credit scores are the result of a compilation of several different sources of data that are available in your credit report. That data falls into four distinct categories, which are listed in order of how much weight they usually have in informing your score:
- Payment history
- Amounts owed
- Length of credit history
- Types of credit used
You’ve heard before that paying credit card bills on time is crucial – and the list above is why. Your payment history – if you pay on time, if you pay in full or only the minimum balance, and if you have late or missed payments – is the single most important factor in determining your credit score.
Avoiding a Bad Score
There are two ways to have a bad credit score. The first, not surprisingly, is by not using credit wisely. That means spending more than you can afford, not paying your bills on time, and having too much outstanding credit, often spread across multiple credit card accounts.
The second is not as intuitive but is still a factor: you can have a bad credit score if you don’t use credit at all. In order to determine your score, there needs to be some kind of history to base it on. So simply cutting up your credit cards, or never having a credit card account, isn’t the path to a high credit score.
Not sure where to begin repairing a less-than-ideal credit score? Take the five-minute Repairing Credit Coach Lesson to get ideas for repairing your credit score in the short- and long-term and create an actionable list. To begin, select Get Started. Follow the prompts, answer the questions, and provide information when asked.
Every financial situation is different, but some of the most common ways to improve a bad credit score include:
- Pay each bill on time. Try to pay a higher amount than the minimum each time – if budget permits!
- Avoid new credit card purchases, reducing your credit utilization total. Your balances make up 30% of your credit score. Higher the balance means higher the utilization.
- Educate yourself on credit best practices by taking a five-minute online course from our Financial Wellness Center. A little knowledge can contribute to long term financial resilience.
- Consider getting professional help from a consumer credit counseling agency. By consulting a certified credit counselor, you can develop a budget and debt management plan – customized to your specific needs.
Another helpful tool to rebuild credit is to apply for a US Eagle Credit Builder Credit Card! Whether your credit is bruised, imperfect, or even non-existent, our credit building Visa credit card can help you establish (or reestablish) credit through responsible use and consistent payments.
This blog content was created in partnership with Banzai. Banzai has partnered with U.S. Eagle Federal Credit Union to bring clear, in-depth lessons to help dive into the financial topics you care most about.