Understanding Your Credit Score and Ways To Improve It

Understanding Your Credit Score and Ways To Improve It

By: Ginny Garbowski, Digital Branch Manager

Date: March 4, 2022

Credit scores can be complex and difficult to understand, but are incredibly important indicators of overall financial health. Whether you're looking for a mortgage or an auto loan, credit scores are used by lenders to determine your eligibility.

As the real estate market continues to run hot (according to a recent study done by New Jersey Realtors1, the average price of a single-family New Jersey home in the first quarter of 2021 was $500,628) and car prices remain at record highs (Kelley Blue Book2 reported that the average new car in America sold for $46,404 in January 2022), the strength of your credit score can mean the difference between achieving your financial goals or not.

person managing their credit score online

What a credit score considers

There are five factors that impact credit score3: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit in use (10%). Understanding these factors and their respective influence is critical if you want to raise your score and lower credit risk over time:

  • The best way to establish credit and maintain a good score is by paying bills on time, as more than one-third of the score is based on not missing payments. For every 30 days that a payment is past due, the three major credit bureaus are notified.4 So it's important to make all payments on time, and get back on track as quickly as possible if you miss a payment. The longer track record you have of making timely payments, the more it will positively impact your credit score. With this goal in mind, automatic payment tools can be very helpful in establishing good habits.
  • The amount that you owe creditors at any given point in time composes 30% of your credit score, so it's important to keep track of balances versus your limits. Overspending and high balances can lead to elevated stress, as debt may get out of hand quickly. Don't forget that payments eventually must be made in full.
  • Length of credit history makes up approximately 15% of your score, and takes into account your oldest credit line as well as the average age of all your accounts. You can help optimize your score by keeping your oldest account active through using it at least once a year.
  • New credit composes about 10% of your score, factoring in how many recent requests have been made and the length of time since credit report inquiries were made by lenders. Given these criteria, it is suggested that you rate-shop for an auto loan or mortgage within a 14-day period5.
  • There are two types of credit that can be in use at any given time — installment and revolving. An installment account, like a car loan or mortgage, has an end date. A revolving account, like a credit card, has no set end date. The two types account for 10% of your credit score, but it is not required to have both.

How to improve your credit score

A credit score can often fluctuate, and you should always strive to improve it. A few tips for raising the score or reestablishing your credit include:

  • Get in the habit of monitoring your score at least annually.
  • Apply for and open accounts only as needed.
  • Have credit cards and manage them responsibly.

Your credit score can range from 300-8506, with 300-619 considered poor, 620-679 seen as fair, 680-739 considered good, and 740-plus viewed as excellent. Whatever your score may be, there are almost always ways to improve it over time. And a better credit score can help you obtain employment, rent an apartment or purchase a home, decrease stress and feel financially secure. Whether you're just starting to establish credit or looking to rebuild it, understanding what influences your credit score and taking steps to improve it can be truly life-changing.

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person's circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments.

  1. Retrieved from: https://www.nj.com/news/2021/05/the-average-price-of-an-nj-home-is-100k-more-than-what-it-was-last-year.html
  2. Retrieved from: https://www.kbb.com/car-news/average-new-car-price-declines/
  3. Retrieved from: https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/
  4. Retrieved from: https://www.nerdwallet.com/article/finance/late-bill-payment-reported#:~:text=decisions%20with%20confidence.-,Minimize%20Credit%20Score%20Damage%20From%20Late%20Payments,as%20much%20as%20100%20points.&text=If%20you%20have%20otherwise%20spotless,points%20off%20your%20credit%20score
  5. Retrieved from: https://www.creditkarma.com/advice/i/will-rate-shopping-hurt-my-score
  6. Retrieved from: https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/