How to Achieve and Maintain a Healthy Credit Score

How to Achieve and Maintain a Healthy Credit Score

Author: Michael Cancella on January 24, 2013

The after effect of the credit crisis has led to a tightening of lending standards; banks simply are not as willing to loan people money as they have been in the past.  This reluctance on the part of lending institutions to take on risk has resulted in a person’s credit score, always an important number, being more critical now than ever.  Fortuitously there are a number of relatively simple ways to create a strong credit history and a resulting high credit score.  First, however, an outline of what a credit score is and how it is calculated will help frame the context of this article.

The most commonly used credit score model is called FICO, which stands for Fair Isaac Corporation, the company that designed what has become the industry standard used by almost all lenders.   A FICO score is an algorithm that produces a numeric summary of the information contained in your credit reports that illustrates the potential credit risk you represent to whoever might lend you money or offer you a line of credit through a product such as a credit card.  The FICO credit score is comprised of five factors.  The first, and most important, is your payment history, which at 35% represents the largest single input into your overall score.  It is a reflection of whether you make payments on time and if you do not, how often you are late on paying your bills.  The higher the proportion of on-time payments, the better your score will be.  The second factor that determines your credit score is the amount of money you owe.  This represents 30% of your score and is a reflection not just of the total owed, but with the type of debt, the number of accounts the debt is spread out over and the proportion of money owed relative to how much credit you have available, with this latter factor being known as your credit utilization score. The third factor that affects your credit score is the overall length of your credit history  which constitutes 15% of your total score.  Establishing credit as soon as you can and maintaining that credit throughout your life is a critical component of a healthy credit score. The fourth factor is the types of credit accounts you hold, with a diversity of accounts being desirable.  This is worth 10% of your credit score. Recent credit activity is the fifth and final factor; this also counts 10% towards your score. 

Paying your bills on time is the easiest and most effective way of having a high credit score.  There are a number of other less obvious moves that can be made that can also lead to the creation and maintenance of a great credit score.  Here are a few suggestions:

Michael Cancella
Michael Cancella: Michael Cancella graduated magna cum laude from Columbia University with a B.A in History in 2010. After graduating he worked in the finance industry at a hedge fund startup and is currently going through the CFA Program in an effort to broaden his knowledge of finance and the economy. Prior to returning to school to finish his degree at Columbia, he spent a number of years i

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