If you plan to take out a loan, buy some type of insurance, negotiate a reasonable utility bill, or even get a job in the next few years – your credit score better be in good shape. It’s one thing to just make your payments on time, but it’s a totally different thing to strategically boost your credit score, brick by brick. Number by number. This post will give you the roadmap. I’ll let you know what actually determines your credit score, then I’ll show you how to boost your credit.
(Photo by Kevin Newton)
First things first, let’s find out what factors actually determine your credit score
1- Payment History
Payment history is said to represent 35% (most important of the factors) of your overall credit score and it is based on how consistent you are at paying your bills. What kind of bills?
Mortgage, credit cards, car loans, retail cards, and the like.
The good news is that one missed payment isn’t going to crush you. What the lenders are looking for here is an overall reliability of you paying your bills on time. Lenders want to know that if they give you a loan – that you’re good to pay them back.
So what can you do?
The best practice here is to pay each bill in full when you receive it. A great rule to implement for yourself is to make sure that your mortgage, car loans, and other regular payments are accounted for in each month’s budget. And when it comes to the credit cards, do not buy an item with your card unless you already have the money in your checking account
Bonus points earned if you have an emergency fund buffer built up in case of unexpected expenses or a job loss.
If you let a payment slip through the cracks, no worries. You can set up automatic payments or use your calendar of choice to make sure you’re not missing your bills next month. And as long as you get back on track, you’ll see the positive results as your credit score continues to grow!
2- Credit Utilization
Take a look at your kitchen/dining room table. For the sake of argument, let’s assume there are 6 seats at your table. If you’re having dinner with the family and 4 of the 6 seats are taken, your chair utilization is 66%.
The same is true with your credit. If you took all of your credit cards, lines of credit, and other credit available to you, and add up the credit limits for each account – your total credit available would be 100%. Credit utilization tells lenders how much of that available credit you are currently using.
Anything over 30% is a negative that can drag down your credit score. Borrowers in this category are seen to be a higher risk because they may be overextended.
What can you do to lower your credit utilization, then?
You can pay your credit card bills more often than once per month. By paying every other Friday, for example, when your month is complete and your total balance is calculated, your outstanding amount will be much lower – thus you will be utilizing less of your credit in the eyes of the lender.
Another option is to ask for a credit limit increase. If you increase your credit available and don’t spend more than you normally would, you will automatically be using less of the total credit available to you.
Finally, you could just use your credit cards less often each month. Try cash or a debit card, and if that’s what it takes to get you under that 30% credit utilization range, then it could be worth the change.
3- Length of Credit History
This factor simply tells lenders how long you’ve been in this credit game. If you’re new around here, your score will likely be lower compared to someone who has been using credit for decades. Those long-tenured credit users are typically seen as more reliable. And a reliable credit user will tend to have a higher score.
So what can you do?
You know that credit card you have in your wallet/purse from that department store or different bank that you haven’t used in forever? You know… The one that you’ve been thinking of canceling next month.
Just cut that card up (so that you won’t use it and it can’t be stolen from you) and keep the account active. This is especially helpful if that card represents your oldest line of credit. If you opened that account 10 years ago and your other most used card is only 5 years old, by closing that older account you will effectively be cutting your length of credit history in half.
Give your newer accounts time to mature, all while making payments on time and utilizing less than 30% of your total credit, and then delete this older card a few years down the road. At that time, closing the card will have a minimal negative impact.
4- Recent Activity
This factor measures how many times you’ve applied for lines of credit lately. The research here shows that people applying for and/or opening more lines of credit in a short period of time are a higher risk. This is especially true if your credit history (#3 above) is on the shorter side.
What to do?
Safeguard your Social Security Number so that you are less likely to be a victim of identity theft. One of the easiest ways to torpedo a credit score (and your overall finances) is to have lines of credit opened in your name by identity thieves.
Now that we have security accounted for, make sure you do your research before opening any new accounts. Is this the perfect credit card for your current needs? Are you sure that the payment terms are acceptable for that new car? And make sure to shop prices before the seller checks your credit.
These are all ways to help avoid unnecessary “pulls” of your credit and thereby reduces your recent credit activity. You know what that means, right…? Higher credit score.
5- Outstanding Debt Ratio (also – Debt-to-Income Ratio)
Similar to Credit Utilization (#2 above), Outstanding Debt Ratio (ODR) tells a lender how much debt you currently have, as compared to your total available income.
For example, if have $200,000 remaining on your mortgage and you currently earn $50,000 annually, your Outstanding Debt Ratio would be 4:1.
What to do?
When it comes to Outstanding Debt Ratio, the lower the better. But if you’re like most Americans with a mortgage, car payment(s), student loans, and other liabilities, reducing this ratio can be tough if you have a short amount of time. Lucky for us consumers, though, ODR is one of the least impactful factors on your credit score.
Still, if we want to earn the best score possible, improving your ODR will be important at some point. And in order to make improvements here, you can negotiate a raise at work or start a side hustle… All while paying down your outstanding debts. Before too long, that 4:1 ratio above will be much closer to an even number – and a higher credit score.
Your credit score has a major impact on many aspects of your life. Some obvious and others a little more hidden. No matter your current financial situation, there are undeniable benefits to improving this number. So start working on your plan and implementing the strategies above. And before you know it, an excellent credit score won’t be a fantasy. It will be your reality.
What are your thoughts? Do you have a less than ideal score and if so – have you tried any of these methods? Or – if you’re in the “excellent” category, what are some things you’ve done to get there? Let us know in the comments below!
Thanks for reading!
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