What’s in a credit score and what does it mean for your financial health?

Author Nickels
Read time 5 minutes read time

What’s in a credit score? Seemingly everything. Your credit score can determine how much house you can buy, what kind of car you drive and, in some cases if you’ll get that job.

So, when looking at your total financial health picture it’s important to not only know your number but also how you can make sure your score meets your household goals. Believe it or not, a credit card can be a great way to build your credit score.

When used properly, credit cards demonstrate your ability to manage debt, maintain a working budget and showcases your reliability as a borrower. But, a poorly managed credit card can have the exact opposite effects.

Leveraging a credit card to improve your credit score isn’t as simple as just making payments on time. There are steps you can take to make sure you’re making the best use of your credit card spending and giving your score the maximum boost. In previous posts we’ve talked about leveraging 0% introductory offers, so we won’t go into that here but if you need a refresher, give the post another read. And if you want to know more about #creditcardhealth check out our previous post: What is Credit Card Health?

If you’re new to the whole credit score game, trying to undo some past hiccups or just curious about improving your credit score, these tips are for you.

How you can use your credit card to improve your credit score.

Determine where you are and where you want to be.

You are entitled to one free credit report per year from TransUnion, Equifax and Experian – the three most trusted credit reporting agencies. If you’re score is between 670 – 739 there’s no place to go but up! If you’re score is under 670, there’s work to be done. Never let a low score discourage you from reaching your goals, it won’t be easy but with persistence and planning you can do it.

Get to know the facts.

Credit scores are calculated based on five components: payment history, amounts owed, length of credit history, new credit or inquires and your credit mix. All of which are pretty self-explanatory but in case you were wondering… your credit mix factors in how many different types of credit accounts you have, such as mortgage, personal loan, etc.

Now that you know your score and how its calculated, you can put together a plan for success based on these tips:

Payment history

Paying your credit card balance in full by your due date is ideal, but no matter what always make at least your minimum payment on time. For extra credit you can pay your balance off before your credit card’s closing date. This date is not the same as the due date. Your score is calculated based on the balance your credit card company reports to the credit bureaus. If your balance is $1000 at closing that’s what gets reported to the credit bureaus even if you pay your balance off on your due date. Why does it matter? Well that goes back to your amounts owed (see next tip for more details). If you want to take advantage of this option, be sure to call your credit card company and find out your credit card’s exact closing date.

Amounts owed

Watch your balances. In order for your credit cards to work for you, you’ll need to maintain a pretty low debt to credit ratio. Ideally you want to keep your balance to about 10% of your credit card(s) spending limit. If you make a large purchase and plan on paying it off on your due date, this is the perfect opportunity to find out when your card’s closing date is and pay your balance on that day or sooner. This way you can avoid having the large purchase negatively impact your debt to credit ratio.

Length of credit history and new credit/inquiries

These two are different but similar so we’ll save some time by discussing them together. It’s pretty simple, your credit worthiness improves when you show a long-term history of using and paying off debts. But, multiple new inquiries into your credit, and an influx of new credit cards will adversely impact your credit score. If you apply for a credit card and aren’t approved – don’t immediately apply for another. Review your credit history, figure out what you can fix and take some time to do some maintenance. A good option for new borrowers or those with lower credit scores are secured credit cards. You’ll have to put in some money upfront but using the card and paying the balance each month will help to drive your score up.

Credit mix

All of one thing, even a good thing, is never enough. You want your credit history to consist of more than just credit card debt and payments. Having a mix of personal loans, auto loans and mortgages can add some much-needed balance to your credit history and is calculated positively by credit bureaus.  

Bonus tips!

If you’ve maintained a good payment history with your credit card company give them a call and ask about lowering your APR. Most credit card companies value good customers and are willing to work with you. This will lower your interest and help you pay off your debt even quicker. While you’re at it, you can inquire about increasing your limit which will help to lower your debt to income ration. But be careful, you don’t want to fall into the overspending trap.

Only do this if you’re prepared to pay off that higher limit each month.

The biggest tip for success- set realistic goals! No matter where your number is it’ll take time to move the needle. Keep following us, Credit Card Coach on twitter, for more tips.