What can consumers do to improve credit scores?*
Credit scoring models are complex and often vary among creditors and for different types of credit. Only the creditor can explain what might improve a score under the particular model used to evaluate a credit application.
Scoring models generally evaluate the following types of information:
- Payment history. It is likely that a score will be affected negatively for late payments, accounts referred to collections, or bankruptcies.
- Amount of outstanding debt. Many scoring models evaluate the amount of debt compared to credit limits. Debt amounts that are close to the credit limit will likely have a negative effect on a score.
- Length of credit history. Generally, scoring models give more points the longer a customer’s credit track record it. An insufficient credit history may have an effect on a score, but that can be offset by other factors, such as timely payments and low balances.
- Recent applications for credit. Many scoring models consider whether a consumer has applied for credit recently by looking at “inquiries” on the credit report. A lot of inquiries can negatively affect a score. However, not all inquiries are counted. Inquiries by creditors who are monitoring an account or looking at credit reports to make “prescreened” credit offers are not counted. Credit inquiries made by consumers of their own credit records aren’t included either. Some creditors and credit bureaus claim that they do not even consider inquiries. Others claim that a lot of inquiries will have only a small impact on a score.
- Number and types of credit accounts. Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on a score. In addition, many models consider the type of credit accounts and give more points to what they consider a healthy “mix.” Under some scoring models, loans from finance companies may negatively affect a credit score.
Scoring models may be based on more than just information in a credit report. For example, the model may consider information from a credit application as well as information about jobs or occupations, length of employment, and homeownership.
To improve a credit score under most models, it is best to concentrate on paying bills on time, paying down outstanding balances, and not taking on new debt. It’s likely to take some time to improve a score significantly. Errors involving negative information should be disputed. (See NCLC Consumer Guide, “What You Should Know About Your Credit Report.”)
*Reprinted with permission from National Consumer Law Center, Fair Credit Reporting, “Understanding Credit Scores” (6th ed. 2006).
