What is a Credit Score and How Do I Increase Mine?

Posted by Randy Lucka on Dec 12, 2015 06:00:00 AM

Topic: ALL

Couple looking at credit scores on a phone

When you're considering making a big purchase like a home or a car, a lot of emphasis is placed on your credit score, but what is a credit score? A credit score is an important factor when seeking financing for a home or any other major purchase. As such, it is equally important to understand what contributes to your credit score, how you can increase and maintain your score, and how to properly report any credit errors or discrepancies.

Understanding your credit score

It’s important that you understand your credit score and the factors that contribute to it.  A person’s credit score lets lenders know the ability for which they are capable of repaying debt or a line of credit.

Credit scores are calculated by credit reporting agencies. These agencies compile reports on individuals and include personal information, credit accounts and history, public financial records, and credit inquiries.

Credit scores analyze a borrower's credit history, considering influences such as:

  • Payment history

  • Debt-to-credit ratio

  • Length of credit history or the amount of time credit has been established

  • New credit accounts and inquiries

  • Diversity of credit

Increasing your credit score

While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time:

  • Pay your bills on time. 
    Late payments and collections can have a serious negative impact on your score.

  • Limit your credit applications. 
    Having a large number of inquiries on your credit report can decrease your score.

  • Reduce your credit card balances. 
    If you are “maxed” out on your credit cards, this will affect your credit score negatively.

  • If you have limited credit, obtain additional credit. 
    Not having sufficient credit can negatively affect your score.

Maintaining your credit score

To maintain your credit score, it is important to check your credit report yearly and take action to correct any mistakes. Managing your credit, however, should be done constantly. Follow these helpful tips to stay in control of your credit:

  • Keep track of your expenses. 
    Save transaction receipts and check them against your accounts. Be sure to report any discrepancies immediately.

  • Create and follow a budget. 
    Knowing your monthly debt and other monetary obligations can position you to spend excess funds wisely.

  • Spend within your limits. 
    Once you’ve created a budget, know and follow that budget diligently. If you need to use credit, be sure to spend cautiously while keeping in mind the 20/10 rule—debt should not exceed 20 percent of your annual net income and monthly debt payments should be kept under 10 percent of your monthly net income. 

  • Have an emergency fund
    Avoid “maxing” out credit cards so you have credit available in case of an emergency. If possible, set up an emergency savings account to better position yourself for a potential emergency and decrease the need to take out additional lines of credit.  

  • Stay in touch with your creditors. 
    If you find you are unable to make a payment, let your lender know immediately. Often times, they are able to work with you if they are given notice.

Reporting credit errors

To correct any errors on your credit report, you must write to the credit card company and explain the error. If the creditor concurs that an error has occurred, the credit card company must report and correct the error to the credit reporting agency.

To obtain a copy of your credit report, contact any of these credit reporting agencies:

  1. Experian

  2. Trans Union LLC

  3. Equifax

To see if you qualify for a mortgage, contact us!