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Why your credit scores matter & what to do to keep them healthy

If you’re like a lot of Americans, you may not pay particularly close attention to your credit scores or even know how they’re formulated. For example, a recent survey by the Consumer Federation of America and Vantage Score Solutions found that just 62% of respondents knew they had more than one credit score. That’s down from 78% in 2012. And just 66% knew that keeping a low credit card balance can raise a low credit score or maintain a high one — a big slip from 85% in 2012.

“By being aware of your scores and what goes into calculating them, you can take proactive steps to keep your score healthy, or know the steps to take to improve your score when needed.”

Why do credit scores matter?

While your credit scores may seem like just a number and have little to do with your day-to-day life, your credit can affect everything from how much you pay for a mortgage or auto loan to whether you are offered a job. Knowing how your actions affect your credit scores can help ensure you have the highest credit scores possible.

“Knowing your score is important for planning out your credit and finance needs,” said Michael Bovee, who has worked in debt resolution for more than 20 years and is the co-founder of Resolve. “If you know you have a major purchase in front of you, being aware of your scores, and what goes into calculating them, you can take proactive steps to keep your score healthy, or know the steps to take to improve your score when needed.”

Let’s take a look at what credit scores mean, what goes into them and how you can improve your credit scores no matter what your current financial situation.

How your credit scores are calculated

First of all, it’s important to understand that you have more than one credit score. There are three main consumer credit reporting bureaus — Experian, Equifax and TransUnion — and each have their own credit scoring methodology similar to the original FICO credit scoring model created in the 1950s. In recent years, alternative credit scores have been introduced that weigh factors such as payment history on utilities, rent and other financial factors. Here we’ll focus on the traditional scoring model, which is made up of five different categories, each weighing differently on your final credit score:


Payment History


Credit Utilization


Length of Credit History


New Credit


Mix of Credit Types

1. Payment history
The payments you’ve made on things like credit cards, your auto loan and even student loans make up your payment history. This category counts for 35% of your total credit score. If you’ve never made a late payment, chances are your payment history is giving your credit scores a nice boost. Late payments, though, especially those that are 90-or-more days late, can really ding your scores. That’s why it’s so important to make your payments on time.

2. Credit utilization
This category makes up 30% of your total credit score and measures how much of your available credit you’re actually using. For example, if you have a credit card with a $12,000 line of credit and you’ve charged $9,000 in purchases recently, that means your credit utilization on that one card is 75%. That kind of ratio is going to have a negative impact on your credit scores. It’s best to keep your credit utilization below 30% if at all possible. Also, keep in mind that this is the category that usually has the most direct effect on regular fluctuations in your credit scores. So, if you go on vacation and run up a big tab, you’re probably going to see it reflected in your credit score until you pay that balance down.

3. Length of credit history
This is just what it sounds like — a measure of how long you’ve had credit accounts in your name. Fortunately, your length of credit history accounts for just 15% of your score, but it can be frustrating if it’s routinely dragging down your scores, even just a little. For young people, it’s a particularly tough category because there’s really no way to “improve” your score here without simply getting older. That’s why it’s important to establish some sort of credit early in life. Some people without a credit history or a “thin” credit profile start with secured credit cards to help them get started.

4. New credit
Unlike length of credit history, this category does help younger consumers looking to improve their credit, but that doesn’t mean you should run out and apply for every type of credit you can find. Taking out too many lines of credit in a short period of time can actually have a negative effect on your credit scores. This category counts for just 10% of your overall credit score.

5. Credit mix
The types of credit accounts you have can be important to your credit scores because lenders like to see that you’ve been able to handle different kinds of revolving credit and loans. This category makes up 10% of your overall credit score.

So, what's a good credit score?

Each of the categories above adds to your overall credit score, so let’s review the different ranges your credit score may fall into. Credit reporting bureau Experian provides the following table showing how they classify credit scores:

As you can see from this chart, your specific score isn’t as important as the range in which your score falls. So, if you have an exceptional credit score of 814, fretting about getting a “perfect” credit score of 850 is probably a waste of time. You’re already in the highest range and will get the best terms and conditions available to borrowers. However, if you’re on the cusp of a higher range, say a 735, improving your credit score by just five points will likely get you better terms and conditions than you would otherwise receive.

Why is that important? It all comes down to money. We used’s loan savings calculator to see just how much money having a higher credit score could save someone purchasing a home with a $300,000 mortgage loan. The bottom line: Improving your credit scores can save you substantial money over the life of your mortgage. The same is true for credit card interest rates, auto loans and personal loans.

How to start improving your credit

First and foremost, you’ll want to check your credit reports. You can get free copies of your credit reports from all three credit reporting bureaus every year from You’ll want to look for any errors that may be dragging down your credit scores — accounts that aren’t yours, reporting errors like late payments that you actually made on time, and any late payments that are not within the allowed reporting time (usually seven years). If anything looks incorrect, it’s a good idea to dispute the information with the credit reporting bureau.

For people who are pretty on top of their finances, improving your credit scores can be as simple as keeping your credit card balances low (and paying them off in full each month if you can), making your payments on time and not applying for too many lines of credit all at once. Things get a little more complicated, though, if you’re significantly in debt and can’t afford to make your payments on time.

“If you cannot pay down your debt, and improve your utilization, you would at least want to maintain timely payments,” Resolve’s Bovee explained. “If you cannot even keep current with payments, you may be looking at needing some form of debt relief intervention. Some debt relief options are not necessarily harmful to your credit score, and other steps will damage your credit considerably. If your situation is one where not everyone you owe is going to get paid as promised, it is time to stop thinking about your credit score, and getting out of debt in the most effective way. Credit scores and financing options will return once you deal with your debt.”

What to do if you need to rebuild your credit first

Debt consolidation loan
If your credit hasn’t already been too significantly impacted by your debt woes, you may qualify for a debt consolidation loan. This debt relief method lets you roll up all or several of your existing debts into one lower-interest loan. You can get a debt consolidation loan from a bank or other lending institutions like credit unions and online lenders and use it to pay off your outstanding, unsecured debts. Learn more about what to look for in a debt consolidation loan.

Debt management plan (DMP)
A DMP involves working with a credit counseling agency that becomes your go-between with creditors. The agency works out a deal to lower your monthly payments through reduced interest rates and likely reduced or eliminated late fees and penalties. Learn more about how debt consolidation and debt management differ.

Debt settlement
This debt relief option won’t improve your credit score right away, and in fact, will likely cause your credit score to drop for a time. That’s because debt settlement allows you to negotiate with creditors to pay off debt on delinquent, unsecured credit accounts and personal loans over a specified time (or all at once) for an amount less than what you owe.

You can also try to settle directly with the lender, though it will still negatively impact your credit for a period of time. Learn more about rebuilding your credit after debt settlement.

Bankruptcy can be a great way to find debt relief, but it has a longer impact on your credit than other debt relief options. If you have more debt than you are able to repay, bankruptcy can provide court-ordered protection from creditors, discharge unsecured debts entirely or allow you to enter into an organized repayment plan. Learn more about rebuilding your credit after bankruptcy.

As you consider these options, keep in mind that there are a lot of less-than-scrupulous companies out there, so be sure to do your homework on every agency you’re considering. You may want to consider these tips for avoiding credit repair scams.