While you may not think of it regularly, your credit score can have significant ramifications on some major life events. Your score can influence whether or not you’re approved for things like credit cards or personal loans. It can change how much you pay in interest for a mortgage or whether you get accepted into an apartment complex. It can even affect your chances of getting and staying married. As such, it’s not surprising that people with the highest credit scores typically report receiving the best rewards from credit card issuers.
If a single number can have such a meaningful impact, it’s wise to do as much as possible to improve it. At Credio, we put together a quick primer on what factors influence your credit score along with some easy ways to up your standing. Note that the percentages listed for each item come from FICO.
The biggest factor influencing your score is whether or not you pay back your debts on time, whether it be from a credit card or student loan. Being 30, 60, or 90 days late on a payment can put a big dent in your credit health. However, the worst things by far are total write-offs like bankruptcies or foreclosures.
Fortunately, this is one of the simplest parts of your score to improve. But it does take time.
Tip 1: If you find yourself with what’s called a ‘derogatory mark’ (a credit score penalty for a late payment), you can still prevent things from getting worse. If you make a payment only 30 or 60 days late, it should have a minimal impact and roll off in about two years. If you’re 90 days late, however, that could stay on your credit report for up to seven years! One 90-day late payment could damage your score as much as a bankruptcy filing. So, the easiest thing to do is pay your bills on time. If that proves impossible, try your best to limit delays to 30 or 60 days.
Tip 2: It’s not always easy, but you can formally dispute a derogatory mark with one of the credit bureaus through their website, especially if there is an error in your credit report. Errors will typically be removed without too much issue, but it can be difficult to sway a credit bureau to alter a legitimate record.
The next biggest impact on your credit score is the amount of debt you owe. While this may seem straightforward, there are some tricks that can help you boost this segment’s score.
Tip 1: Get as much credit as you can. Credit bureaus typically calculate your debt levels as a percentage of your total credit limit. So, if you have a credit card balance of $100 and your limit is $1,000, the bureau will view you as using 10% of your credit utilization. Generally, credit bureaus like to see a wide cushion between your balance and your limit — in other words, a lower percentage.
The easiest way to lower the percentage is simply by raising your credit limit. Getting another credit card (making sure to avoid annual fees) can easily double or triple your limit. You can also call your credit card provider and ask for an increase in your limit. These actions can easily and permanently boost this segment’s score without changing your spending habits.
Tip 2: It may seem counterintuitive, but you should regularly use the lines of credit that you have. While many think that using your credit card is viewed negatively, it can actually help build a history of on-time payments. Having a balance that needs to be paid off every now and then shows lenders that you’re capable and willing to pay back your debts. However, you should always pay off your credit cards in full each month to avoid any interest charges. The average American has nearly $5,000 in credit card debt, equating to hundreds of dollars per year in unnecessary interest charges.
Two things matter when calculating this part of your score: the age of your oldest account and the average age of all your accounts. The older your credit history is, the higher your score.
Tip 1: Get credit early. Many people view credit cards negatively, but this perception can hurt you down the road. It can take up to seven years before credit bureaus start to up your score in this segment, so getting credit early is a must. Even if you decide never to use the card, it may be a good idea to get a no-fee, low limit credit card once you’re 18. The extra years that you will have on your credit history could save you thousands when you apply for a mortgage decades later. College students can take advantage of cards specifically designed for them. Others can find some great options here:
Tip 2: Don’t close old credit accounts. While you may be tempted to close a credit card you haven’t used in years, it could end up negatively impacting your score if it’s old enough to lengthen your average credit history. Closing newer accounts is likely fine, but make sure to keep your oldest accounts open.
Tip 3: Add yourself to someone’s existing credit card. While this takes a friend or family member to pull off, you can easily up your credit age by adding your name to a credit card that they’ve already had for a few years. You don’t even have to end up using that credit card at all, but being registered on the account could help improve your credit history more than any other method.
Credit bureaus often look at how many lines of credit you’ve applied to recently. The more times you apply for credit, the lower your score will be. Credit inquiries come in two forms: hard and soft. It’s very important to understand the difference, especially when looking to improve your score.
Tip 1: Hard inquiries occur when an institution checks your report to approve or decline you for new credit. When applying for things like credit cards or mortgages, this is fairly impossible to avoid. Still, the impact is typically small and rolls off completely after 24 months. Bureaus sometimes view applying for more sources of credit as a negative because it may indicate that you’re having cash flow troubles, but a few hard inquiries here and there shouldn’t be a problem.
Tip 2: Soft inquiries are more passive, and can sometimes occur without your knowledge. Examples include background checks for a new job or looking up your own credit score online. These typically don’t impact your score as much as hard inquiries (if at all), so don’t worry about limiting soft inquiries as much as hard inquiries.
Another relatively small portion of your score, this section looks at the types of credit you have as well as the number of accounts in your name.
Tip 1: The most popular forms of credit are credit cards, mortgages, auto loans and student debt. Although it seems to contradict common sense, you actually get more points for having a wide array of debt sources, as it can show your ability to pay back various forms of loans. The easiest way to boost your score is by building a well-rounded debt portfolio. However, this constitutes only a fraction of your score and should happen fairly naturally as you age anyway, so don’t worry too much about adding numerous accounts simply to game the system.
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