At some point in your life you may want to borrow money for a house, car or boat or apply for credit of some type. Having healthy credit makes borrowing easier and cheaper. Your credit score determines how much you can borrow and how much it will cost you to borrow. The information used in your credit history is also used as a determining factor not only when obtaining credit and loans but also can play a factor in renting an apartment and auto insurance.
What are the credit score ranges?
- 300 – 579 Very poor
- 580 – 669 Fair
- 670 – 739 Good
- 740 – 799 Very good
- 800 – 850 Exceptional
Below you'll see how your credit score is created, and we’ll provide tips that may help improve your score.
How your credit score is determined
- Your payment history - This looks at whether or not you pay your bills on time.
Tip: Always pay the minimum payment due on time. Signing up for automatic/electronic payments can make this easier to remember.
- Your credit utilization ratio - This measures how much credit you use compared to your credit limit.
Tip: Use less than 30% of your total credit limit — across all your cards. If you use more credit, your credit score may be lowered.
- Your length of credit history - This basically means the longer you’ve been paying on time the better.
Tip: Instead of canceling old credit cards, consider keeping them open and active, without using them every day. To do this, try setting up a small automatic reoccurring charge that you can easily pay off each month.
- Your credit mix - This looks at what types of credit you use: installment (has an end date, think loans) or revolving (has no end date, think credit cards).
Tip: Don’t worry if you don’t have a mix of these accounts today. Installment accounts likely come with time as you purchase larger items, like a car or a home.
- Credit inquiries - This looks at how often you are applying for new credit.
Tip: Don’t apply for, or close, several credit accounts in a short period of time. Doing so can ding your credit score.
Pay your bills on time
Paying back your credit card and loan balances on time is the most important factor in your credit score. If you have a history of paying bills late, it is important to start paying them on time. If you've missed payments, get current and stay current. Each on-time payment updates positive information to your credit report. The longer your history of paying bills on time, the higher that portion of your credit score will be.
Tip: If covering the full bill each month isn't possible, set up auto pay for the minimum amount due, then make additional payments as you're able to.
Review your credit report
Errors happen, so review your credit report closely for:
- Accounts that aren't yours,
- Accounts with the wrong account date or credit limit listed,
- Names and Social Security numbers that aren't yours,
- Addresses where you've never lived, and
- Negative information, like late payments, older than seven years. (Late payments can only legally stay on your credit report for seven years.)
Under the Fair Credit Reporting Act, the three national credit bureaus — Equifax, Experian, and TransUnion — along with your creditors, are responsible for correcting errors on your credit report. The Federal Trade Commission (FTC) website has detailed steps for correcting errors, as well as a sample dispute letter.
If you find accounts that aren't yours and suspect you've been the victim of identity theft, you'll need to place a fraud alert on your credit report, close those accounts and file a police report and a complaint with the FTC. To provide further protection, State Farm® offers Identity Restoration insurance.
Pay down your credit card balances
The amount of debt you have is heavily scrutinized for your credit score. Your total reported debt owed is taken into account, as well as the number of accounts with outstanding balances and how much available credit has been used. The total reported debt is compared to the total credit available to determine your debt-to-credit ratio. Your credit score can suffer if those numbers are too close together.
Your best plan for lowering your debt is to make a plan to pay it off. In some cases consolidating debt onto one lower interest card might make sense for you. But keep in mind, credit inquiries and opening new credit can lower your credit score, at least in the short term. Closing old cards with high credit limits can also throw off your debt-to-credit ratio. If a new credit offer is too good to pass up, keep your total amount of credit available high by not closing any old credit cards.
Tip: Avoid carrying a balance if you can. Carrying a balance can occur when you're not paying your credit card bill in full each month, meaning you're getting charged interest fees on past purchases.
Use credit but do it wisely
You must use credit regularly for creditors to update your credit report with current, accurate information. While paying with cash or a debit card may make it easier to keep to a budget, a cash-only lifestyle does very little to improve your credit score.
The easiest way to use credit is with a credit card, especially if you're trying to improve your score to qualify for an installment loan. If you have an old credit card, start using it responsibly again. A long credit history is a positive determining factor for your credit score, so making an inactive account active again may be advantageous.
Although you need to make a point to use credit regularly, only charge as much as you can pay off. Keep your credit balances low so as not to damage your debt-to-credit ratio.
Don’t purchase large items you can’t afford now
If you don’t have the money set aside for that flat-screen TV, paying for it with credit will cost you more in the long run. Think of your credit card as an extension of your checking account, and save up the cash for larger purchases before you swipe.
Keep track of spending
Review your monthly statements when they arrive in the mail to make sure nothing looks amiss. This also gives you the chance to note spending patterns and see areas where you can cut back if you’ve struggled to pay your bills.