Have you ever looked at your credit score and thought, what does that even mean? Is it good? Can I fix it? Here’s an explanation of the 6 factors that affect your credit score, and how you can make them better!
Credit scores range from 300-850, and a “Good” score is usually anything over 700, but you can usually get loans, apartments, etc. with a score around 630 or better, though you may have a higher interest rate. Different types of businesses will run different parts of your credit information to determine your score for their purposes, so your credit score may not be exactly the same when they run it versus when you run it on your own or check it on Credit Karma. Improving your credit score usually requires patience and persistence for 2-3 years. You can make a huge improvement in your score in just that short amount of time and once you know how to keep your credit score up, you will find it much easier not to let it drop like that again.
Step 1: No derogatory marks.
Any accounts that have gone delinquent or gone to collections can stay on your account for 7-10 years and they will anchor your score to the floor. When you become current on those accounts by paying on time or paying them off, then those derogatory marks lessen in impact, and after a few years they usually stop affecting you very harshly. This is the main reason it may take 2-3 years to really get your credit up to a “good” score.
Pro-tip: Check your credit report with Credit Karma or individually with one of the credit bureaus to make sure everything on your account is accurate and there are no derogatory marks you don’t know about.
Step 2: Make all minimum payments on time.
The length of time that you missed payments is significant. If you were overdue by 30-60 days your score will drop somewhat, but it is fairly easy to recover from when you get current again. If you missed payments for over 90 days, this is going to have a longer impact on your score. Keeping all your accounts current for a few years will drastically improve your score.
Pro-tip: If you have a $0 balance on your card, paying nothing IS paying on time!
Step 3: Lower the percentage of available credit that you are using.
This is referred to as “utilization.” For example, if you have a $1000 line of credit and a $2000 line of credit, your total available credit is $3000. if you have an outstanding balance of $300 on your smaller card, you are using 10% of your overall credit, and 30% of that individual line. The lower the better, but Ideally you want to keep utilization under 30% overall.
Pro-tip: If you no longer use your cards, you might ask that your bank increase your credit limit to lower your total available credit. DO NOT run that balance up even higher though!!
Step 4: Get older.
No, I wish I was kidding. The age of your credit accounts affects your score, and they are averaged out. Anytime you get a new loan you bring down the age of your credit. This doesn’t impact you as strongly as the previous steps, but it is the main reason young people (especially under 22) automatically have terrible credit.
Pro-tip: If your parent has good credit, they can add you as an authorized user on their credit card and if the bank reports that to the credit unions, you will receive the benefit of how long your parent has held that card.
Step 5: Increase your number of accounts.
This will happen naturally as time goes on, get new cars, new credit cards, new student loans, etc. Each time you apply for a new line of credit, though, you will receive a hard inquiry on your account as well as a drop in your credit age. I would not stress this aspect too much, as long as you have one loan or line of credit you are currently making payments on then you are fine.
Pro-tip: A variety of types of debt like student loans, vehicle loans, credit lines, and a mortgage will make you look way better to lenders because they know you’ve got all your ducks in a row. They don’t all have to be current debts, either.
Step 6: Don’t apply for loans all the time.
This also has low impact on your score, as it is unavoidable sometimes. You’ll get hard inquiries on your credit any time a business pulls your credit report. That means applying for an apartment, changing phone companies, sometimes utilities places have to run it, background checks for work, shopping around for an auto loan, and many more. The impact on your score usually lasts around 3 months, and its pretty minor.
Pro-tip: If you plan to apply for an important loan, like a mortgage, make sure you don’t have any hard inquiries on your account already.
Common credit myth- you must carry a balance to build credit- no. As long as the account is open, it helps you. Most major banks will let a zero balance credit card sit idle for many months, or even a year. They will also usually notify you before they close your account, giving you time to use the card and reset their idle counter. If you are worried they will not warn you, you can simply charge a tank of gas or something once every 6 months or so, and pay it off immediately. No need to carry that balance over and pay interest on it.
Another common misconception, credit cards are the easiest way to build credit. Thats kind of oversimplified, a more accurate statement would be that credit cards are the easiest way to hurt your credit. Some other options are: auto loans, personal loans, student loans, and secured credit cards.
If your credit score has suffered due to past events and is now unable to be approved for anything but really bad interest rates on low balance cards, ask your bank about a secured credit card. Generally, you give the bank a small sum of money (i have mostly heard $500-1500) and that becomes your credit limit. You use it like a credit card and pay it back regularly, and this is reported to the credit bureaus as on time payment history.
If your credit is in really rough shape, and you’re throwing around words like “bankruptcy,” hold off and check out the National Foundation for Credit Counseling.They will counsel you for free, over the phone, about whether you are a good candidate for a debt management plan or if bankruptcy might really be the best option, and if it is, they will help you understand what to expect. Please don’t go straight to a bankruptcy lawyer! This foundation is well established and highly reputable. Call them before you do anything else!
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