Credit scores are essential for everyone – even for people who have no plans of buying a house or a car anytime soon. Your credit score is based on your history of paying back the money you owe and any new credit accounts you may have opened in the past.

The credit score you have can have a significant impact on your financial future. It can determine whether or not you'll be approved for loans, mortgages, or insurance policies. It can also affect how much interest rates you'll be charged when applying for credit.

What Does A Credit Report Comprise?

Your credit report summarizes your credit transactions for the past 10 years. This includes your payment history, which accounts for a substantial 35% to 40% of your total credit score. That's because a late or missed payment can negatively affect your score and make it tougher to get low-interest rates on loans, credit cards, and more. So, paying your bills regularly is just as important as paying off the balance each month.

To calculate your credit score correctly, you need to have a solid understanding of how the various components of your credit score impact your overall credit rating. Let's take a look at what makes up your score.

Your FICO score is a three-digit number used to represent your creditworthiness. A higher score indicates that you are less likely to default on a loan or other financial obligation. The FICO score uses five factors to determine how risky you are as a borrower:

Payment History (35%):

This looks at how often you've paid bills on time and for how long. The longer you've been responsible with your payments, the better it is for your credit score.

Amounts Owed (30%):

This has to do with how much debt you have compared to how much money you make each month. The lower this ratio is, the better for your credit score. If your balances are high relative to their limits, it's typically considered a negative factor because it suggests that you may struggle to keep up with payments if they increase.

 Length of Credit History (15%):

This refers to how long you have been using credit and making payments on time — not just one particular account, but all accounts combined over time. If you've had sensible payment habits, it suggests more stability.

Mix of Credit Accounts (10%):

Different types of loans show different aspects of your financial health, so having a combination of types of accounts helps show lenders that you can handle different kinds of debt.

New Credit (10%):

The more credit accounts you open, the lower your FICO score. This is because new accounts can add to your credit utilization ratio, which is the amount of debt you have compared to the amount of available credit, or they can reflect a change in the types of accounts you have. These factors make it seem like you're trying to obtain more credit than is wise or affordable.

Check Your Credit Score & Report

Your credit report is a record of information about your borrowing history, including the amount of credit you've been recently using, inquiries into your credit and details about where you filed for bankruptcy. You can check your credit score and report for free from the three major credit reporting bureaus: Equifax, Experian, and TransUnion.

To get your score from all three bureaus and reports at once, go to You're entitled to one free copy of your credit report from each bureau annually. Your score will differ from bureau to bureau because it's based on the information in their records about you. But all three scores will give you a good idea of where you stand financially.

Another option is to take advantage of one of the many free credit scores offered by personal finance websites such as NerdWallet and Credit Sesame. These websites use your credit report and credit score to determine whether you qualify for loans, credit cards and other types of borrowing. We recommend checking your credit score once per month.

Dispute & Fix Any Errors

Once you have all three reports, go through each one carefully for any discrepancies, especially accounts or debts that aren't yours. It's hard to build good credit when there are errors on your report that make it look like you have bad credit.

If you find a mistake on your credit report, you can dispute it. For example, if you see an old delinquent account on your report but have paid it off, you can dispute it as paid. If you are disputing an account you have paid off, include a copy of your statement showing the payment.

Additionally, when disputing inaccurate data, explain why and provide evidence to support your claim. For example, if there is an error on your file because someone has stolen your identity and opened new accounts in your name, include copies of documents from law enforcement agencies or the courts that verify this theft.

You can do this by writing a letter to the credit bureau reporting the incorrect information or by calling them directly. Once they receive your dispute, they will have 30 days to investigate it. Then, if they find the data inaccurate, they will remove it from your report.

Pay Off Your Debts

You can improve your credit score by paying off debt, especially high-interest debt such as payday loans, auto title loans, overdraft fees and other loans with interest rates higher than 20%. Pay off these types of debts as quickly as possible, so they don't affect your credit score as much.

The more debt you pay off, the better your score will be because it shows creditors that you are responsible enough to pay off what you owe them. On the other hand, the longer you carry debt, the more it negatively affects your financial future. For example, you'll pay more interest charges and may even get late fees. This can affect your ability to qualify for loans or lines of credit in the future.

What Is A Pay-For-Delete Agreement?

A pay-for-delete agreement is an alternative to bankruptcy for people who want to get rid of their debts quickly but don't have enough money to pay off all their creditors.

The idea behind pay-for-delete agreements is that, for a fee, companies will remove the negative information from your credit reports and make it less likely that lenders will see it in the future. They also hope the payment will encourage lenders to extend credit without looking at the report since they are less likely to find derogatory items.

If you decide to use a pay-for-delete service, you should understand how long the deletion will last. Many companies offer only temporary fixes that may last anywhere from 30 days to six months. While these services may help with some of your problems, they can't stop all creditors from seeing negative information on your report.

What Is A Charge-Off?

A charge-off is a negative entry on your credit report that indicates you have not paid a debt. A creditor may choose to charge off a debt if the original amount owed has grown significantly, if they believe they will never be able to collect on the debt, or if they think that trying to collect would be more trouble than it's worth.

If you have multiple charge-offs on your report, banks may view them negatively and increase interest rates or deny loans. As such, lenders are more likely to look at other factors when deciding whether or not to grant you credit. Unless these other factors are very poor, having one or two charge-offs won't prevent you from getting approved for an auto loan or mortgage.

Increase Your Credit Limits

If you have good credit but have a low credit limit, it can hurt your score. A low limit can mean that you're maxing out your cards, which increases the risk that you'll miss a payment or not pay off your balance in full each month.

When you request a raise in your credit limit, the lender will review your account and consider whether or not they think you're financially responsible. If they see that you're making payments on time and keeping charges to a minimum, they may increase your limit.

For example, if you have a credit card with a $5,000 limit and you use only $1,000 of that, increasing your limit to $10,000 will likely boost your score. In turn, this will help improve your overall FICO score by lowering the amount of available credit you currently use.

Keep Your Credit Utilization Low

Credit utilization is a percentage of the amount you owe versus the total amount of credit you have available. For example, if you have a $10,000 credit limit on a single card and you owe $2,000 on that card, then your credit utilization would be 20%.

The lower your credit utilization is, the better it is for your credit score. The higher the percentage of debt-to-available credit, the lower your credit score will be and vice versa. So, if you want to improve your score, make sure not to use more than 30% of your available credit at any given time.

Credit utilization also plays a role in determining how much you pay in interest payments each month. If you use more than 30% of your available credit, lenders will assume that you are unable to pay your balance in full each month and will charge interest rates accordingly.

The best strategy for managing your credit utilization ratio is to pay off debt when possible and keep balances low on other accounts so that they don’t affect your overall score too much. A good rule of thumb is to keep your utilization rate under 30%. That means if you have $10,000 in available credit, you should never have more than $3,000 in debt on your cards at any given time.

Pay Your Bills on Time and Don't Miss Payments

This may seem like an obvious tip, but it's also one of the most effective ways to improve your credit score. You'll want to pay all of your bills on time, every month – no exceptions! And if you do happen to miss a payment (which is probably inevitable at some point), then catch up as soon as possible by paying off the balance in full immediately after missing the payment date or by making a partial payment that covers at least one month's worth of interest charges.

If you have accounts that are not yet past due, pay them off immediately. This will help keep your overall balance low and reduce the risk associated with delinquent payments. 

If you have past due accounts, contact the creditor immediately so they can work with you to set up an affordable payment plan or offer other solutions for getting back on track before it affects your credit score negatively. The best way to avoid late payments is to set up automatic payments from your bank account or credit card. You can also set up automatic payments from an online account through services such as PayPal or Google Wallet.

Diversify Your Credit Mix

While having many different types of credit is great for your credit score, it can also be helpful for your financial health to have different types of accounts. The most common type of credit account is an installment loan, like a car loan or student loan.

Installment loans usually carry lower interest rates than revolving accounts, including credit cards and personal loans. If you don't have any revolving accounts, lenders might assume that you aren't able to handle more complex financial responsibilities.

While installment loans are repaid over time with fixed monthly payments, revolving accounts are paid off as you use them with variable interest rates and fees that change every month. Having the right combination of installment and revolving accounts will demonstrate your ability to manage different financial obligations.

Leave Old Accounts & Credit Cards Open

Closing an account can hurt your score because it might shorten your overall history or reduce the number of total accounts on your report. The key is to ensure that you don’t carry a balance on these older cards. Your goal should be to pay off the card in full every month and never let it get close to its limit. If you carry a balance, it could lower your credit score because having debt indicates an inability to manage your money responsibly.

Aim to hold on to older cards, even if you’ve paid them off or don’t think you’ll use them. You can strengthen your credit history by keeping old accounts open, but you must be strategic about it. The only exception to keeping an older card open is if you are charged an annual fee and don’t want to continue paying it just for your credit score.

Keep Balances Low on Your Credit Cards

High balances can mean that you're spending more than you can afford, which is not good for your credit score. If you have a lot of credit card debt and no emergency fund, consider transferring some of your balance to a card with 0% APR for 18 months or more, then pay it off before the promotional period ends. This can help reduce the interest you'll pay on those balances without giving up any rewards points or cash back benefits from those cards.

Should I Use A Credit Repair Company?

The average person unfamiliar with the inner workings of the credit reporting system will find it difficult to correct errors in their report and may need some guidance. Credit repair companies are an excellent resource for those who have fallen behind on their bills or have made some poor financial decisions that have negatively impacted their credit score. They may also be able to help you rebuild your credit score, but you will have to pay monthly fees or other charges.

Keep in mind that services of credit repair companies are not cheap. Unfortunately, many people are misled by unscrupulous companies that offer free services as a way to gain access to your personal information. The best way to protect yourself from these scams is by researching a company and checking with the Better Business Bureau before signing any contracts or paying any money upfront for their services.

Key Takeaways

  • Don't max out your credit cards or overextend yourself with high balances.
  • A good credit mix helps improve scores. Try not to rely on any one type of debt for more than 30% of your total debt load.
  • Avoid opening new credit accounts unless absolutely necessary. Having too many open accounts could make you look like a riskier borrower.
  • If you have a lot of late payments on your report, it can take years for those mistakes to fall off your report and disappear from your score. That's why having good habits in paying bills is so important.
  • You can't fix or improve a credit score overnight. It takes time to build a positive record with lenders, and lenders want to see consistency over time to trust you with their money.

About the author Greg Lorenzo

Greg is a financial expert who has been advising his audience on loans for over 10 years. He has a wealth of knowledge and experience in the area, and he is passionate about helping people get the best possible deal on their loans. Greg is an expert in negotiating loans, and he has a proven track record of getting his clients the best possible terms. He is also a strong advocate for financial literacy, and he regularly gives workshops and seminars on the topic.

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