Americans Don't Get What Helps and Hurts Their Credit Scores

by Maurie Backman | Nov. 25, 2019

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It never helps to be in the dark, especially when it comes to your credit score. 

The higher your credit score, the easier it becomes to borrow money and the better the interest rates you'll be able to access. That borrowing can come in the form of a personal loan, a mortgage, or a new credit card. But if you don't understand how your credit score is calculated, it'll be harder to take steps to improve it. 

Unfortunately, a large number of Americans are somewhat clueless in this regard. Discover's recent Credit Health survey reveals that 23% of Americans mistakenly think checking their own credit score can negatively affect it. Furthermore, only 47% of U.S. adults know that payment history is a major factor in determining a credit score. 

A woman and dog sitting on the floor surrounded by papers and a calculator.

Image source: Getty Images

Here's some more misinformation that's circulating: A good 18% of Americans think income impacts a credit score when, in fact, it doesn't. And 15% think employment history is a factor when, in reality, it's not.

Don't be in the dark about how credit scores are calculated. If you understand what goes into them, you can work on boosting yours and open the door to more borrowing options. 

The anatomy of a credit score

There are five factors that go into calculating the FICO® Score, which is the industry leader when it comes to credit scores. Each factor carries a certain amount of weight. 

The first and most important factor is payment history -- which makes up 35% of your score. Your payment history speaks to your tendency to pay bills responsibly, and if you want to improve your score, the answer is simple: Pay your bills on time, all the time. 

The next factor in determining a credit score is utilization, or the amount of available credit you're using at once. Utilization makes up 30% of your credit score, and you should aim to keep your utilization rate at or below 30%. This means that if you're looking at a total line of credit of $10,000, you shouldn't owe more than $3,000 at once. 

If your utilization regularly exceeds the 30% mark, there are a couple of things you can do. First, you can pay off a chunk of existing debt. Additionally, you can ask your card issuer to increase your credit limit on your cards in good standing. This may be an easier way to bring your utilization into favorable territory. 

A third factor that goes into calculating a credit score is length of credit history, which comprises 15% of your score. Unfortunately, that's the one factor you probably can't control. If you're fairly new to the workforce, for example, and you've only had bills in your name for a few months, you won't have much of a credit history to speak of. You can help your credit history, however, by retaining long-term credit accounts in good standing (in other words, don't rush to close out that old credit card you never use). 

The final two factors that are used to establish a credit score are new accounts and credit mix, each of which is worth 10% of your score. New accounts, as the name implies, refers to the number of new credit cards or loans you take out and the number of hard credit checks in a single year. Credit mix, meanwhile, speaks to the types of loans you have, as there's a clear distinction between carrying a mortgage and having yet another credit card. You can help your score by maintaining a healthy credit mix and not applying for too many new credit accounts at once. 

Understanding your credit score

Credit scores range from a low of 300 to a high of 850. You don't need perfect credit to get approved for a loan, or snag decent rates, but you should, ideally, aim for a score of 740 or above. That's considered "very good" by credit bureau Experian, and it opens up your borrowing options. If your score is lower than that, aim to understand the factors that go into that number, and work on improving upon them to the best of your ability.

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