How To Improve Your Credit Score
Did you know there are three different types of credit scores? Each score considers similar factors but may rate you differently. So, what goes into your credit score?
Credit Score Factors Explained
On-time Payment and Payment History – 35% of Your Score (High Impact)
Paying your bills on time is crucial! It’s surprising, but it’s not just credit cards that affect your credit history—bills like gym memberships, student loans, and utility payments (such as internet service) also play a role in determining your creditworthiness. Going from a 100% on-time payment record to even one missed payment can drop your score by as much as 100 points. A collection or charge-off, which occurs when you don’t pay for an extended period, is even more damaging. These negative marks can stay on your credit report for seven years.
To ensure you stay on top of payments, I set up automatic minimum payments for everything and then manually verify each bill is paid at the beginning of the month. This gives me peace of mind, while others may prefer to automate all their payments. Decide what works best for you: automating your bills or managing them manually.
Utilization – 30% (High Impact)
Even if your credit card has a $2,000 limit, you should NOT use 100% of that limit! Aim to stay below 30%, but the lower, the better. The best practice is to pay off your balance in full every month.
Some studies have shown that individuals with 0% utilization may have lower credit scores than those with a utilization rate of 1-10%. This does not imply that keeping a small balance is advantageous. More likely, those with 0% utilization have never had any credit extended to them, resulting in a low score due to a lack of credit history. Always pay your bill in full each month. If you can’t afford it, don’t buy it!
Length of Credit History – 15% (Medium Impact)
This factor is challenging to change. The sooner you start building credit, the better. Parents with good credit who add their children as authorized users on their credit cards can give their children a head start with credit scores of 700+ or higher. However, this carries a risk—if there’s a missed payment, it will also lower the child’s score.
For those with no credit history, obtaining a zero-fee credit card during college is a good starting point. If you have some credit, being an authorized user, or choosing a no annual fee card or a decent rewards card like Chase Freedom, can help you build your credit. Research credit cards that suit your lifestyle, and remember, the most significant factor in your credit score is utilization—pay off your credit card every month!
Credit Mix – 10% (Low Impact)
Credit mix evaluates the variety of accounts you hold. There are two types of debt: installment debt (like student loans, gym memberships, and mortgages, where you pay a fixed amount until it’s paid off) and revolving debt (like credit cards, where you have a set limit and can borrow up to that limit without needing new credit for every purchase).
A responsible mix of credit use is beneficial. Having student loans, a paid-off installment debt like a gym membership, and a couple of responsibly used credit cards with low utilization can earn you an ‘A’ in the credit mix category. While its impact on your score is not significant, having few accounts can result in a lower score.
Hard Pulls/Hard Inquiries – 10% (Low Impact)
When someone checks your credit, it can negatively affect your score. This may seem unfair until you consider that someone trying to open many credit accounts is seen as a potential risk. If you open a credit card, your score might take a temporary hit, but managing your utilization effectively can positively influence this factor.
Hard pulls can also occur when you request a credit line increase, apply for a loan, submit a rental application, or even set up services like Comcast internet.
Understanding credit score factors is essential for your financial health. Have you ever checked your credit score?
