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How to Calculate and Improve Your Credit Score

What's your credit score?

Your credit score is one of the most important measures of your creditworthiness. Commonly known as the FICO® score, it’s based on metrics developed by Fair Isaac Corporation. This is not the only way to get a credit score, but the FICO® score is most commonly used by lenders to determine the risk involved in a particular loan. Most credit scores operate within the range of 300 to 850. The higher your score is, the less risky you are to lenders.

Knowing what impacts your credit score can help you take steps to improve it. There are five factors that help determine your credit score.

Your payment history (35% of your score)

The contributing factors are whether you make credit card and mortgage payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. The higher your proportion of on-time payments, the higher your score will be.

Tip to improve: If you frequently pay your credit card bill late, set up payment reminders through your bank’s online portal. Every time you miss a payment, you risk losing points.

Amount owed on loans and credit cards (30% of your score)

This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.

Tip to improve: Reduce the amount of debt you owe by paying off credit cards with the highest balances and interest rate first.

Length of your credit history (15% of your score)

The longer your history of making on-time payments, the higher your score will be. Having no credit can hurt your score if lenders have no credit history to review. If you have poor credit, consider opening a secure credit card to start rebuilding your credit history.

Tip to improve: Don’t close your oldest credit card account, even after you have paid off the balance.

Types of open accounts (10% of your score)

Having a mix of accounts, including student loans, mortgage, and retail and credit cards may improve your score – if you pay on time.

Tip to improve: Don’t open accounts just to have a better credit mix. Apply for and open new credit accounts only as you really need them.

Recent credit activity (10% of your score)

Every application to open a new credit account or loan with a financial institution causes a hard credit inquiry to your credit report, which affects your credit score by a few points. Multiple hard inquiries in a short period of time will more significantly impact your credit score and can communicate to lenders that you are desperate for credit or are unable to qualify for credit.

Tip to improve: Avoid applying for multiple lines of credit in a short period of time.Ultimately, the best way to improve your credit score is to use loans and credit cards responsibly and make prompt payments. The more your credit history shows that you can responsibly handle credit, the more willing lenders will be to offer you credit at a competitive rate.

Get your money in order this April for Financial Literacy Month.

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