Five things you should know about your credit score

August 6, 12:10 PMWomen of the Web ExaminerBrit Horvat

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Valorie Simpson is president of Colorado Business Bank Northwest. 

Valorie Simpson, your go-to gal for all things money and finance, is back with more advice. Every other week or so, you'll find her debunking moolah myths and answering your financial questions here. Got a question for Simpson? E-mail it to brithorvat@gmail.com. 

This week, Simpson provides five very helpful tips on how to improve your credit score. Before you learn any credit lessons the hard way, read up on what people never tell you. 

Q: What's up with my credit score?

Simpson says:

A credit score, commonly referred to as a “FICO” score, is used by lenders to aid in determining your likelihood of repaying their loan. Not only is it important for you to be able to borrow money when you need it, but it can also make a big difference in what interest rate you pay … which ultimately means you pay less for what you buy. FICO scores range from 300 to 850; the higher the score the better.

FICO scores are weighted by five factors:

• Payment History – 35%
• Total Amounts Owed – 30%
• Length of Credit History – 15%
• New Credit – 10%
• Type of Credit in Use – 10%

Five steps to improving your credit score:

1. Pay your bills on time: this is the single most important contributor to a good credit score, comprising 35% of your total. Delinquent payments, charge-offs and bankruptcies lower your score. If you have trouble writing checks in a timely manner, consider having the payments automatically taken from your account, paying bills on-line or write the check the same day you receive the bill. Recent credit history carries more weight than the past, so starting to pay bills on time today will make a difference within a short period of time. Derogatory credit remains on your credit report for seven years, and bankruptcies for ten. 
2. Make sure you establish credit: Many people like to pay with cash, thinking it will help them get a loan some day because they don’t have any debt. Not true. Even though it might seem counter-intuitive, it helps to have credit if you don’t have too much. Keep in mind, checking accounts are not reported to your credit bureau. That is, unless you overdraw your account, the bank closes it and turns it over to a collection agency.
3. Don’t close your revolving loan accounts when you pay them off. Again, this might not seem logical to you…but let me explain. One criterion to help increase your score is how much you have available on your credit card or line of credit, versus how much you owe. The lower percentage the better. If you “close” a revolving debt, the available credit is reduced, thereby lowering your credit score.
4. Keep balances low on revolving credit: One of the criteria in determining your credit score is your account balances compared to your available credit. For example, if you have a $5,000 credit card limit, it helps your credit score if you owe $1,500 instead of $4,500. Why? Because you aren’t maxed out on your debt, which makes you a better credit risk in the eyes of a lender.
5. Frequent loan inquiries can hurt (lower) your FICO score. This means every time someone pulls a credit bureau, it could hurt your score. So if you go shopping for cars and allow five dealerships to pull your credit bureau to try to get the best deal…it might backfire on you. It is the same with any type of credit: mortgages, furniture, credit cards, etc. The only exception is a “soft inquiry” which is if you pull your own credit bureau.

Q: Will I be denied a loan request based on my FICO score?

Simpson says:

Not necessarily. Lenders want their loans to be repaid, and repaid on time. A FICO score is one tool lenders use in determining your creditworthiness. It tells them a great deal about how you manage your finances. However, they will also look at other factors such as debt ratio (how much debt you have divided by your income), job stability and collateral (the physical security they have in case you don’t pay your loan, i.e. house, car, furniture, etc.)

It’s important to understand what your credit bureau looks like and to change incorrect information that could be lowering your credit score. To obtain a free credit report once a year from all three credit reporting agencies, I would recommend contacting Annual Credit Report at 1-877-322-8228 or at www.annualcreditreport.com.

If you disagree with the information in the report, contact the agencies directly at the numbers listed below.

• Equifax (800) 685-1111
• Experian (888) 397-3742
•  Tran Union (800) 916-8800