Understanding Credit Scores and Practical Steps to Improve and Maintain a Healthy Score

by | May 23, 2024

A credit score plays a pivotal role in your financial life, impacting your ability to secure loans, credit cards, and even housing or employment. A healthy credit score not only opens doors but also leads to better interest rates and borrowing terms. Understanding how credit scores are calculated and learning the practical steps to improve and maintain a healthy score are essential for building a strong financial foundation.

How Credit Scores Are Calculated

Credit scores are determined by various factors that collectively assess an individual’s creditworthiness. Here are the key components:

  • Payment History (35%): This is the largest factor and reflects your history of making timely payments on credit accounts. Late or missed payments can have a significant negative impact.
  • Credit Utilization (30%): This measures the amount of credit used relative to your credit limit. A high utilization rate can indicate financial stress and may lower your score.
  • Length of Credit History (15%): The longer your credit accounts have been open, the better, as it provides lenders with more data on your borrowing behavior.
  • New Credit (10%): Opening new credit accounts or applying for too many loans within a short time frame can negatively impact your score.
  • Credit Mix (10%): A diverse mix of credit accounts, including credit cards, mortgages, and installment loans, indicates responsible credit management.

TIPS!

To get the most out of your credit score it is important to make timely payments and keep your credit utilization at a healthy limit. 

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Different Types of Credit Scores

While there are many credit scoring models, the most commonly used are:

  • FICO Score: Widely used by lenders and ranging from 300 to 850, the FICO score focuses heavily on payment history and credit utilization.
  • VantageScore: Similar to the FICO score, it ranges from 300 to 850 but uses a different weighting system and is more forgiving of short credit histories.

Practical Steps to Improve and Maintain a Healthy Score

Timely Payments

  • Prioritize Payment History: Given its significant impact on your credit score, always aim to pay bills on time. Setting up automatic payments or reminders can help ensure you never miss a payment.
  • Deal with Delinquencies: If you have late payments, address them promptly. Consistent on-time payments over time can help improve your score.

Optimize Credit Utilization

  • Lower Credit Card Balances: Aim to use less than 30% of your available credit limit. Paying down existing balances reduces your utilization ratio, which positively affects your score.
  • Increase Credit Limits: If possible, request an increase in your credit limit. A higher limit can improve your utilization ratio, provided you don’t increase spending.

Be Cautious with New Credit Applications

  • Limit Hard Inquiries: Hard inquiries, which occur when you apply for new credit, can temporarily lower your score. Only apply for credit when necessary and avoid multiple applications in a short period.
  • Preserve Your Credit History: Maintain long-standing credit accounts even if you no longer use them. Closing old accounts can shorten your credit history and affect your score.

TIPS!

Trying to get out of credit card debt so you can improve your credit score? Ask us for help and get a free debt health checkup

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Diversify Your Credit Mix

  • Balance Credit Types: Having a mix of credit types, such as credit cards, personal loans, and mortgages, can improve your score. However, don’t take on unnecessary debt just for the sake of diversification.

Regularly Review Your Credit Report

  • Check for Errors: Periodically review your credit report for inaccuracies or fraudulent activity that could affect your score. You can obtain free reports from each of the major credit bureaus annually at AnnualCreditReport.com.
  • Dispute Inaccuracies: If you find errors, file disputes with the credit bureaus to have them corrected, which can potentially boost your score.

Next Steps

Maintaining a healthy credit score requires understanding how scores are calculated and taking deliberate steps to manage your credit responsibly. By focusing on timely payments, optimizing your credit utilization, being cautious with new credit applications, diversifying your credit mix, and regularly reviewing your credit report, you can build and maintain a strong credit profile that supports your financial goals.

Get the most out of your credit score. Contact the Legacy Life Planning office and ask for Lance, He will get you scheduled with one of his Debt Elimination concierge members to walk you step by step in your estate planning process.

Give us a call at 423-341-8601