How to Improve Your Credit Score
25 August, 2021
There’s so much to be excited about in the early days of adulthood: making your own money, decorating your living space, planning your future, and monitoring your credit score! What? You don’t think tracking your credit history is fun?
Alright, you caught me. Credit scores aren’t thrilling. But they’re your ticket to other things that are. For instance, think about what you wanted when you were younger. You probably dreamt about striking out on your own, having road trip adventures, and living with your best friends. However, each of those goals relies on a strong credit score. From getting a loan for a car to renting an apartment, there’s just no avoiding it.
Making your credit score the best it can be will open up any number of possibilities. Whether you have plans for this year or a decade from now, improving yours will help your world run smoother. With that in mind, here are ways you can tackle your credit score and watch it climb.
What is a Credit Score?
A credit score is a number, typically from 300 to 850, that rates your creditworthiness. Creditworthiness essentially means how suitable you are to receive financing, or financial credit, based on your past behaviors.
The score tells loan lenders whether or not you have a history of financial responsibility. In turn, that indicates to them how likely you are to promptly repay the money they lend you. The higher your number, the better you appear to lenders.
The scoring breaks down into ranges, like this one used by the FICO® scoring model:
· Poor: <580
· Fair: 580 – 669
· Good: 670 – 739
· Very Good: 740 – 799
· Excellent: 800+
Rating ranges can change, though. The other main credit scoring system, VantageScore, uses:
· Very Poor: 300 – 499
· Poor: 500 – 600
· Fair: 601 – 660
· Good: 661 – 780
· Excellent: 781 – 850
Why Does Your Credit Score Matter?
Your credit score has a hand in a lot of things, including many traditional milestones. That’s because anything you need financing for, like a loan, has to take your credit score into account. It tells the lender how reliable you are when it comes to your financial commitments.
Overall, your score influences several factors when you go to get financing. To start, let’s say you want to purchase your first home. But to get the mortgage to afford your dream house, your lender first has to check your credit score. If it’s too low, they may reject you altogether. In contrast, if it’s a great score, you may be able to negotiate favorable terms. With access to lower principals and interest rates, you can save thousands of dollars over the lifetime of your loans.
Alternatively, you may not be ready to buy a home. Instead, you want to move into an apartment with your significant other. Landlords typically run credit checks on potential tenants. With a high score, you improve your chances of approval and reduce the likelihood of your landlord asking for a large deposit.
Whether you choose to settle down in your own home or stay flexible through renting, you’ll likely need to purchase insurance at some point. Perhaps it’s for a car so you can commute to work. But because you have a low score, it drives up the price of your policy.
In this way, your credit score affects multiple parts of your life, from everyday tasks to long-term goals.
How is My Credit Score Calculated?
Thankfully, there’s a method to the madness. They don’t pick a number out of a hat – you have a say in it. Your actions will have an influence on the score (for better or worse).
To start, though, you should know you actually have more than one credit score. This is because multiple companies provide credit scores and have their own methods for calculating it and the selection of data they pull from. These companies are called credit bureaus, and there are three major ones: Equifax, Experian, and TransUnion. Lenders and creditors may use one over the other.
Credit bureaus generally use the same factors when they calculate your score. They include your payment history, the amount you owe, the amount of credit you have available, your credit history’s length, the number of accounts you have, and the types of said accounts. Each one has a different weight in the equation.
The FICO Score breaks it down like this:
· Payment History – 35%: Credit bureaus look at your payment history to determine if you’re in good standing with your creditors. If you miss a payment or regularly make late payments, it can negatively impact your score.
· Credit Utilization – 30%: Your revolving credit balances can heavily impact your score compared to the amount of credit you have. It’s recommended that you keep your utilization below 30% on each credit card. So, if you have a credit limit of $10,000, avoid using more than $3,000 of credit.
· Length of Credit History – 15%: If you are just beginning your credit journey, it may take some time to build a solid credit score. On the other hand, if you have shown your creditworthiness over the years, you'll likely have a better score.
· Credit Mix – 10%: Your credit mix is the type of credit, such as installment loans like auto loans or revolving credit like a credit card. Creditors typically want to know that you know how to manage different types of credit.
· New Credit – 10%: When you apply for a loan or a credit card, your credit score may dip for a short period. This is because opening a new account lowers the average age of your credit history, which, in turn, lowers your score.
You should also know there are factors that don’t impact your credit score. Details about your personal life, such as age, race, marital status, and employment, do not have any impact on your rating. Only information that appears in your credit report counts.
Steps to Improve Your Credit Score
Your credit score isn’t stagnant. It changes over time based on your credit report. Here are some ways you can make a change and improve your score.
Minimize Missed Payments
Chances are, you will miss a payment at one point or another. Whether you are at fault or not, life just happens sometimes. But your payment history has one of the most significant impacts on your credit score. As a result, establishing a record of timely payments is key to an excellent rating.
One of the easiest ways to avoid missing bills is to enroll in an automatic payment system. That way, the only thing you have to worry about is having enough funds in the bank. Although, you also need to watch your balance so you don’t overdraft.
More than that, staying accountable will help you in the long run. If you are having trouble making certain payments, consider your options. You can cancel the service, look for ways to lower costs, or contact your credit card issuer.
Catch Up on Overdue Debts
Outstanding payments can pile up and turn into a cycle of debt. They stay on your credit report for a sizable amount of time, too. Creditors can see late payments on your credit report for up to seven years. Creating a clean slate will help you avoid missing future payments, though, saving you money on late fees and potential financial consequences.
Lower your Credit Utilization Ratio
Here’s another important key term for anyone who owns or wants to own a credit card in the future: credit utilization.
Sometimes called a credit utilization rate, or ratio, this is essentially a percentage that reveals how much you use your credit card. To calculate it, you take the amount you owe on your credit and divide it by the credit limit. This only includes revolving credit, i.e., credit cards and lines of credit, not installment loans.
The total use of your credit card impacts your score, sometimes significantly. Both the FICO® Score and VantageScore categorize credit limits under Amounts Owed and recommend a credit utilization rate under 30%. That means a credit limit of $1,500 shouldn’t exceed a revolving balance of $450. Anything higher might make a lender believe you have trouble responsibly managing your money.
Rethink Opening a New Account
Naturally, to build credit, you may need to open an account or two. That doesn’t mean you should go wild. Keep the number of credit applications you submit low to safeguard your score.
Credit applications can result in a hard inquiry, meaning the credit requested your credit file to look at. Every time a creditor makes this request, it shows up on your credit report. While they only stay on your credit report for around two years, the impact on your credit can still hurt.
Lenders might be suspicious of multiple hard inquiries because it makes it look like you want multiple loans and credit cards, which they’re not sure you can pay. The main exception is when you are rate shopping since that’s not risky behavior.
Also, opening new accounts lowers the average age of your account. That can hurt your score as well.
How Long Does It Take to Build Credit?
There is no predictable timeline for rebuilding your credit. The methods you use to increase it and what you started with play a heavy role in how long it takes.
It also depends on how easy the process is for you. For example, something may happen in your life that causes you to miss a payment. If that’s the only bump in the road, you might be looking at a speedy recovery. On the other hand, if that event triggers other financial issues, building your credit will take much longer.
However, you might be in the situation where you have no credit report at all. This is where all of us start, so don’t worry. Building your credit from the ground up isn’t difficult as long as you are careful. For you, it’ll only take around six months usually.
Working towards a better credit score comes with its challenges. You may have to be more conscientious when you use your credit card or bulk up your savings. While that might not be the definition of “fun,” it will lead you there. With a shiny, new, and improved credit score, you can focus your attention on opportunities. Whether it’s a first home, car, or opening up your own business, the possibilities are endless.
Where do you start, though? Consider Envel your private chauffeur on your building-credit journey.
Envel* offers the type of banking support a cautious spender needs. With our Envelope system, we make it easier to budget, save, and spend. Best of all, there are no monthly fees or minimum balances. So, Envel does the hard work by helping you organize your money without the need for calculators or spreadsheets. That lets you focus on growing your wealth and how you’ll use it.
*Envel® is a financial technology company, not a bank. Banking services provided by nbkc bank, Member FDIC.
Ashley KilroyRead more from Ashley Kilroy