Understanding Your Credit Score

Most Americans don’t know how the credit score works and what factors drive it. There’s also a lot of misconceptions that are passed around; following it might hurt your score. Here, we’ll discuss what impacts your credit score and things you can do to increase your score.

Credit 101 is a series that explores how credit really works. We discuss the basics and debunk common misconceptions (like the idea that you should keep a balance).

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Credit Utilization (High Impact)

Lenders generally don’t want you to have a high credit card balance. The higher your balance, the more difficult it will be for you to pay it off. Keeping a balance on your credit cards might also indicate that you’re unable to pay off your cards.

Note, this credit card balance is based off your monthly statements. If you pay off your credit cards before the statement date, it won’t affect your utilization.

If you’re looking to increase your credit score:

I would recommend that you never carry a balance month-over-month on your credit cards. It’s a common misconception that keeping a balance and paying interest on your credit cards is a good thing — it is never a good idea.

If you have a big transaction coming up or if you use a high percentage of total limit organically, it might make sense to pre-pay your credit cards before your statement to stay in the 0-9% utilization range. It might make sense to pay off your credit cards weekly if you’re trying to rapidly increase your credit score.

Remember, this is a high impact criteria and one of the few that you can immediately address.

Payment History (High Impact)

Lenders want to see that you can make payments on time. This is a good indication of whether you’re likely to make future payments on time.

If you’re looking to increase your credit score:

You should make your payments on time. That might involve setting up auto-pay on your online banking account or pre-paying your credit cards before the statement to make sure you don’t forget.

Derogatory Marks (High Impact)

These include the number of collection accounts, civil judgments, foreclosures, bankruptcies, or tax liens on your credit report. Derogatory marks can easily affect your credit score negatively, so tread carefully.

If you’re looking to increase your credit score:

Make sure that you don’t default on any of your loan products and pay off any debts you owe to the IRS or from a civil judgment.

Age of Credit History (Medium Impact)

Lenders want to know that you’ve been able to manage credit for a long-time.

If you’re looking to increase your credit score:

Don’t close your old credit cards, especially if they don’t have an annual fee. Conventional wisdom says that you should close accounts that you don’t use, but that can dramatically impact your credit score. If your credit card has an annual fee and you don’t really use it, try to do a product change to a card without an annual fee.

Considering average age of accounts, it might make sense to more cards while you’re early in your credit life. For example, let’s say you applied for 1 credit card today and we jumped forward 10 years. If you applied for another credit card at that point, your average age of accounts will drop to 5 years because (10 years + 0 years) / 2 cards = 5 years. If instead you applied to 5 cards right now, and applied for a new card in 10 years time, your average age of credit will only drop to 8.3 years because (10 years * 5 cards + 0 years) / 6 cards = 8.3 years.

Total Accounts (Low Impact)

Lenders like to see that you have several accounts because it shows that you’re responsible with credit and that other lenders have trusted you with credit as well.

If you’re looking to increase your credit score:

You should apply for more credit cards. Again, conventional wisdom (which is very wrong, as we’ve clearly seen) says that the more credit cards you have, the more risky you are. This isn’t the case at all.

Credit Inquiries (Low Impact)

This is the total number of “hard pulls” — things like credit applications — on your credit report. Too many inquiries might suggest that you’re desperate for credit and likely to misuse. It might also indicate that other lenders have been rejecting you.

If you’re looking to increase your credit score:

Apply for credit cards but try to stay in the good of fair range. That means that you should try to have been 1-4 credit applications every 2 years. Remember that this is a low impact category.


Pay off your credit cards, even before the statement is comes (and make sure you’re never late). Don’t default on your loans. Don’t close old credit cards. Apply to 1-4 new credit cards every two years.