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Understanding Your Credit Score

Credit is a fact of life for Americans. Most of us cannot buy a car, home or new big screen TV without credit. When applying for that new credit card, companies will look at your credit score to see if you are a financial risk. Your credit score can also determine what interest rate you will get, and how much something will cost you.

What is a good credit score?

Credit scores range between 300 (extremely high risk) and 850 (extremely low risk). Creditors establish their own guidelines and break points for approving credit, but here is what credit scores may mean for your personal finances:

You’ll be denied credit or approved only at the highest, most costly interest rates.
581- 650
You may qualify for credit at higher interest rates.
You’ll qualify for credit at more moderate interest rates.
You’ll qualify for credit at competitive interest rates.
751 +
You’ll get the most competitive, lowest interest rates on the market.

How is your score calculated?

When you borrow money, your lender sends information to a credit bureau (see side bar for credit bureau contact information). The credit report details how well you have handled your debt to determine a credit score based on five major factors.

Payment history (35%): The first thing any lender wants to know is whether you have paid past credit accounts on time.

Amounts owed (30%): Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low credit score.

Length of credit history (15%):  Generally, a longer credit history will increase your credit score. However, those with a shorter history may also have a high credit score, depending on how the rest of the credit report looks. Your credit score takes into account: how long your credit accounts have been established, including the age of your oldest account; the age of your newest account and average age of all your accounts; how long specific credit accounts have been established; and how long it has been since you used certain accounts.

New credit (10%): Research shows that opening several credit accounts in a short period of time represents a greater risk - especially for people with a shorter credit history.

Types of credit in use (10%): The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.


So, you made some bad decisions in the past and now you are thinking about taking a loan, but first you need to improve your credit score. Here are a few steps you can take to improve your score.

  1. Check your credit report at and correct any inaccuracies. When negative information in your report is accurate, only the passage of time can assure its removal. A credit reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years.

  2. Always pay your bills on time. Delinquencies have the biggest negative effect on your credit score

  3. Pay down your debt. Reducing your overall debt is a very effective way to improve your credit score.

  4. Be cautious about opening or closing lines of credit. Closing credit cards could actually lower your credit score.

  5. Beware of credit-repair scams. Sometimes doing it yourself is the best way to repair your credit. There are many helpful resources available online at the Federal Trade Commission website One resource on the FTC website, “Credit Repair: How to Help Yourself”, explains how you can improve your creditworthiness and lists legitimate resources for low-cost or no-cost help.

There are no shortcuts to improving your credit score. Improving your credit score is more about fixing errors in your credit history (if they exist) and then following the tips listed here to maintain consistent, good credit history. Raising your score after a poor mark on your report, or building credit for the first time, will take patience and discipline.

Additional Resources 





This article was first published in the Winter 2013 edition of the Retiring Right newsletter. Click here to view other newsletters. Not receiving your newsletter, update your address by completing the Change of Address form.


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