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Understanding Your Credit Score & How to Improve It

By: John Lutz01.23.25
Man reviewing finances

If you’ve ever applied for a loan or a credit card, chances are you have had your credit score looked at. Lenders assess your credit score as a measure of the kind of borrower you are—how likely you are to pay them back, keep up with monthly payments, etc. But what exactly is a credit score, and what factors impact whether you have a good or a poor score?

 

What is a Credit Score?

A credit score is a measurement, on a scale of 300 to 850, that measures the likelihood you represent to pay a borrower back for a loan. The number itself is a prediction based on your credit history, which includes your credit’s length and your ability to make payments on time, among other factors. Several different companies provide credit scores and reports, with FICO and Experian being amongst the most common.

Credit scores of 300-579 are generally considered poor, while scores between 580-669 are considered fair. Good credit scores typically are between 670-739, while very good and excellent credit scores are between 740-799 and 800-850, respectively. Ultimately, the determination on whether to approve a loan is up to the borrower and their lending guidelines.

 

How to Find Your Credit Score

You are entitled to a free report of your credit score once a year from the three major credit reporting agencies: Equifax, Experian, and TransUnion. These tools can be accessed by visiting AnnualCreditReport.com. If you’re a credit card holder, explore your credit company’s website or mobile app, as you may have access to a 24/7 credit report and score if the company partners with an agency such as FICO.

As you explore options for accessing your credit score, be wary of any sites or tools that ask for personal information or offers that are “too good to be true.” Also, avoid any applications that charge a large fee to access your credit score. Remember, you’ll be able to access your report for free once a year.

 

What Factors Impact Your Credit Score?

At first glance, your credit score may seem like a meaningless number. However, it carries significance and is reached by determining several different factors. Here are the elements that make up your credit score:

 

Payment History

The most important component of your credit score is your payment history. A lender wants to know that you’ll pay them back on time and in the amounts owed or agreed upon. This piece is one of the best ways to show you are a responsible borrower.

Your payment history will include your record of making payments on loans you currently have or previously held, such as a mortgage, auto loan payment, or school loans. Credit card payments also factor into your payment history. This piece will account for roughly 35% of your credit score.

 

Credit Utilization

While credit utilization may sound intimidating, it’s simply the ratio of your current credit card balances in relation to your total available credit. This percentage ties to the amounts you are spending with your credit card in comparison to the limit your credit card company has given to you. Credit utilization accounts for roughly 30% of your credit score.

In general, you want to have a credit utilization that is below 30% to maintain a good credit score. You can calculate your credit utilization percentage by adding up the current balances on your credit card(s) and any other personal lines of credit. Then, add up the credit limits for each of your credit card(s) or other forms of credit. Next, divide your outstanding balances by your total credit limit, and multiply that result by 100 to learn your credit utilization percentage.

 

Length of Credit History

Your length of credit history will show a lender your ability to handle credit over time. Continued success in managing credit month after month shows a lender that you are a responsible borrower and should provide them with further confidence in lending to you. While your credit history length isn’t as crucial as your credit utilization and payment history, it still accounts for about 15% of your credit score.

Specifically, your credit history length includes the average age of your accounts, as well as the age of your oldest credit account. You’ve probably heard others advise you to never close out your first credit card, and that’s good advice. Your oldest credit card is a great example to show a more robust length of your credit history.

 

Credit Mix

Next, a credit score will also consider your credit mix. More simply, this analyzes the variety of accounts you have and includes credit cards, mortgages, and loans. While it’s good to have a diverse credit mix, it’s not crucial.

As the credit mix only accounts for about 10% of your credit score, you shouldn’t feel the need to consider applying for different loans or credit cards just to boost this area of your credit score. Lenders will be much more interested in your payment history and credit utilization as opposed to your credit mix.

 

New Credit Inquiries

Finally, your credit score will also include any new credit inquiries you’ve had completed. When you apply for a loan or a credit card, the lender will put in a request to look at your personal credit report. This is known as a credit inquiry. Credit inquiries will typically account for around 10% of your total credit score.

There are two types of credit inquiries: a soft inquiry and a hard inquiry. A hard credit inquiry occurs when you apply for a credit card or loan, such as a mortgage, and may affect your credit score. A soft credit inquiry typically occurs when looking at your credit as part of a background check, such as an employer looking at your credit score upon considering whether to hire you.

It’s crucial to remember that a hard credit inquiry cannot be completed without your approval. While it may affect your score, it shouldn’t have too severe an impact. Several hard credit inquiries in a short period of time, however, will negatively impact your score.

 

How Can I Improve My Credit Score?

If you’re unsatisfied with your current credit score, there are several ways you can work to improve it. All the ways in which you can improve your score are tied to the elements that make up a credit score, such as making your payments on time and avoiding several credit inquiries.

Here are some ways you can improve your credit score:

  • Keep your credit card balances low. Avoid impulse purchases, eating out several times a week, and any other unnecessary swipes of your credit card, which will add up significantly over time.
  • Pay your credit card bill(s) and loans on time. Consider setting up automatic payments for your credit card and other loans if you're able to do so. Also, make extra payments on your card and other loans as your monthly finances allow.
  • Check your credit report for errors. If you come across any errors when looking at your credit report, be sure to dispute them with your lender.
  • Keep old credit accounts open. Even if you never use your first credit card, don't close the account. This shows a lender that you have a long credit history.

 

While your credit score is important, your current score isn’t permanent. You can always work to improve it by following the steps above and monitoring your credit report for areas of improvement. Just as your credit score improves, so will your chances of becoming eligible for new credit card products and loans. 

And remember, as an American Heritage member, you can access your FICO 9 Credit Score for free in Mobile and Online Teller. Once enrolled, you can view your credit score and report. Visit AmericanHeritageCU.org/OnlineTeller to register if you don’t have an account.

 

 

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