Anyone can have a good credit score. Though on time payments are a big factor in creating a good credit score, other factors like credit utilization ratio, derogatory marks, number and age of accounts and inquiries all impact a person’s credit score.
Below, we show how each factor impacts credit scores. We also show how to use free online credit monitoring services like Credit Karma to hack a credit score.
What Makes up a Good Credit Score
Wells Fargo, one of the largest financial institutions in the U.S., says it’s more important to know why a credit score is good than just to know the score. They add that when a potential creditor requests a consumer’s FICO credit score, the score comes with “reason codes” that explain the reasoning behind the number. When a lender rejects an application for credit, it’s OK for the consumer to ask the lender to share the reason codes. Learning the reasons behind a rejection can give a consumer a much better idea of how to fix the problem.
The Fair Isaac Corporation, whose software is used to compute FICO credit scores, gives this list of the top ten reason codes that can hurt a good credit score:
Fine print from a BMW financing agreement: “Requires excellent credit history.”
- Serious delinquency.
- Serious delinquency, and public record or collection filed.
- Derogatory public record or collection filed.
- Time since delinquency is too recent or unknown.
- Level of delinquency on accounts.
- Number of accounts with delinquency.
- Amount owed on accounts.
- Proportion of balances to credit limits on revolving accounts is too high.
- Length of time accounts have been established.
- Too many accounts with balances.
Good Credit Score Breakdown
The factors that make up a credit score include:
- Credit Card Utilization: How much of the available credit is the borrower using? Using too high a percentage of available credit monthly negatively impacts the credit score. It’s best to use less than 30% of available credit. 20% is better, and 10% is better still.
- Payment History: Missing payments will drag down a credit score.
- Derogatory Marks: Bankruptcies, tax liens and accounts in collection are situations leading to derogatory marks.
- Age of Credit History: Older credit accounts are better than newer ones when aiming for a good credit score.
- Total Accounts: Too many accounts will bring a score down. So will too few.
- Credit Inquiries: Too many recent credit applications will hurt a good credit score.
Not all the factors that make up a credit score are weighted equally. Below is a chart that shows an approximate mix of the different factors that contribute to a credit score.
Good Credit Score: How to Have One
It’s one thing to say, “Don’t miss payments,” but sometimes that’s easier said than done. Here are some strategies consumers can use to be the best in every category that determines credit scores.
- Credit Utilization. Since this factor has a big impact on a credit score, it’s important to keep it under control. And since lower is better, consumers will want to use as little as possible of their available credit to get the best score they can. That doesn’t just mean paying off the balance faithfully each month, because the number that counts is the one that gets printed on the account holder’s bill. So someone who maxes out their accounts every month, but pays them down to zero, they still have a 100% credit utilization ratio. To combat this, someone aiming for a perfect credit score can check their account balance mid-month and make a payment before the bill is even generated. Managing accounts this way can keep credit utilization ratios low. The good news here is, this factor has a short term effect, so someone who cleans up their act can see results here in a short time. One caveat: using 0% of a credit account is worse than using 30%, so make sure at least to use a little.
Credit utilization: Anything over 30% is bad. Using less of the available credit every month is always better, although 0% will also hurt a credit score.
- Payment History. This factor also carries a lot of weight, but it’s not always easy to remember to pay bills on time. Individuals who struggle with remembering can use calendar apps in phones, tablets or laptops to keep them on target. For example, if a credit card payment is due on the 8th of each month, a repeating reminder on the 6th can be a big help. Alternately, consumers can make use of automatic payment options set up through their creditors. If remembering is not the problem, but inability to pay is, it’s time to spend less. Consider a budgeting app for help with getting spending down to manageable levels. This factor has a long term effect on credit history. Missed payments can stay on a credit report for up to 2 years.
Late payments affect more than just credit score. The above text is from a screenshot for the terms of a Bank of America specialty credit card. Note the extremely high interest rate that applies indefinitely if the account holder ever misses a payment. Image source: Bank of America
- Derogatory Marks. This high-impact factor goes along with “payment history” above. Clearly anyone who pays bills on time won’t have a problem with black marks coming from collection agents or unhappy creditors. This long term factor can last 7 years. Staying out of trouble with the IRS is another big choice here, since tax liens cause derogatory marks.
- Age of Accounts. This factor has a medium impact on a credit score. Someone who’s just
Age of Accounts has a medium impact on credit scores.
starting out can’t do much about it (you can’t have a 15 year average account age if you’re only 21) but it can be managed. The first way is by choosing accounts wisely. Putting some thought into which credit card to get is a good way to keep from deciding to switch cards later on. Knowing that account age matters will also make a borrower think twice before switching cards, just because an attractive offer for a low introductory rate arrived in the mail.
- Number of Accounts. Theoretically, the more credit accounts a consumer can handle, the better it is for their credit score. Realistically however, applying for and maintaining 25 credit accounts is a terrible idea. The thinking is that people with less accounts have less of a track record than those with a high number. But having too many credit accounts is a good way to get in trouble by missing payments or borrowing too much. The more accounts someone has, the more opportunities they have to get in trouble. Since this factor has a low impact on credit score, the way to handle it is to lower personal risk by having less accounts, and not worry too much about it hurting the overall score.
The above screenshot from Credit Karma shows an individual consumer’s number of credit accounts. While the graphic on the left may encourage holding 21+ accounts, since this factor is low impact, it’s better to settle for 2 or 3 instead.
- Credit Inquiries. Someone applying for too many credit accounts because they keep getting rejected (say, 5 accounts in a month) will wind up with a red flag on their credit history. The damage happens when a creditor pulls the consumer’s credit report, placing an “inquiry” notation in it. Too many inquiries will drag down a credit score. The good news is, this factor has a low impact and only affects things in the short term.
Credit Karma’s Good Credit Score Interpretation Tool
Credit Karma offers free, regular access to credit scores, based on data from TransUnion and Equifax. They also provide a handy, free tool consumers can use to look into the reasons behind the scores. The image below shows a sample CreditKarma credit score analysis:
This chart from Credit Karma shows an analysis of the different factors making up a good credit score.
Further, it’s possible to use the tool to drill down deeper into each reason impacting a person’s credit score, and see exactly how that factor helps or hurts. The image below shows a sample analysis of credit utilization:
This chart from Credit Karma shows a sample credit utilization of 18%. Note the colored bar graphic on the left, showing the different ranges.
Good Credit Takes More Than a Good Credit Score
Lenders don’t only look at a good credit score when trying to figure out whether to approve someone for a credit card or loan. They also take into account things like the consumer’s full credit report and annual income. However, since failure to have a good credit score will definitely prevent someone from being approved, boosting the credit score is a great place to start.
Take a peek at this video from Bank of America for more info on what makes a good credit score:
Sources
- Having a Bad Credit Score Can Cost You Money – Experian.com
- Interpreting Your Score – WellsFargo.com