Last week, I talked about what a credit score is and how it can impact your life in a positive – or negative – way. Now that you understand the gist of credit scores, maybe you’re wondering why yours is the number that it is.
A lot of factors go into calculating your credit score. I’ll list them all here and give advice on how to improve those aspects so your score will increase over time. When your credit score increases, your whole life can change for the better. A higher credit score can save you thousands of dollars in the long run, so it’s important to pay attention and monitor what is impacting it.
6 Factors that Affect Credit Score
1. Debt to Credit Ratio
This is one of the most important factors accounted for when averaging your credit score. You can calculate your debt to credit ratio by adding all your credit card balances and dividing them by the sum of your credit card limits. If it is more than 30%, you have a problem, and your credit score will go down. The higher the percentage, the lower the score. Simple, right?
Pay down your credit card debt. There is no easier way to say it. It is best to carry no balance at all so you’re not paying interest on your purchases. If you do have balances on your cards, begin trying to pay them down to that 30% mark. You should see an increase in your score as you make headway.
2. Poor Remarks
Poor remarks have a HUGE negative impact on your score and credit report. The sad thing about remarks is that you don’t get good ones saying, “Hey! This person’s awesome at paying their bills! We love her!” Instead, they say “Delinquent Payment – Sent to Collections.” Fortunately, I have never had a poor remark, but I know people who have, and it can ruin your credit faster than anything!
The only way to keep poor remarks from affecting your credit score is to not get them. Pay your bills on time. If you can’t make your payments, call your credit or loan company. They may work with you.
If you do get a remark, double check to make sure it isn’t an error. If it is, call the company and get it straightened out quick. Derogatory marks on your reports are something that you have to wait out. I’m talking like 7 to 10 years! What more can I say? Pay your bills.
3. Paying On-Time
This is another critical factor for your credit score. One or two missed or late payments can send your score down the toilet fast.
Pay your bills on time. If you are struggling to manage your finances, try setting up automatic bill pay so it comes right out of your account. If you don’t like that idea, at least set reminders for yourself on the calender and pay online. It is much faster and more convenient.
If you can’t make those minimum payments, call your lender and whoever else you owe money to. More often than not, they will work with you. Budget billing on utilities is available. Some credit card companies will let you change your monthly due date. There are options. Use them.
4. Length of Credit History
While this is not as important as the first three, the age of your credit history is factored in. They average out the age of all your credit cards, loans, mortgages, etc., to get a better idea of your financial nature. The longer your history, the better they can evaluate your creditworthiness.
If you are young, the best thing you can do is hold onto that first credit card account you opened, even if you rarely use it. Closing your oldest account will shorten your history, resulting in a negative effect on your score. It will also decrease your credit limit, which is a top-ranking factor in your score. Just sit tight and let time go.
You may also want to consider how many new lines of credit you try to open, as this can shorten the average credit history age as well.
5. Total Number of Accounts
Though not a huge factor, the total number of accounts you have does affect your overall credit score. Typically, the more accounts you have, the better your score – if you are keeping them active, using them responsibly, and paying your bills on-time. On that same note, having varied credit lines, such as an auto loan, some credit cards, and student loans, is helpful too. It shows that lenders trust you and your creditworthiness is good across the board.
This is a tough one. Buying a new car isn’t always feasible, and if you’re not in school, student loans aren’t an option. However, you could apply for a small personal loan through a bank, one that you know you can pay off quickly without paying a bunch on interest, just to have a new line of credit or to help build-up your history. If that doesn’t work, try opening a new credit card account. Be careful though. Opening too many lines of credit at one time can negatively affect your score as well.
6. Number of Hard Credit Inquiries
The last factor in your credit score is the number of hard credit inquiries on your report. There are two types of inquiries made on your account. They are called hard and soft.
Soft inquiries don’t affect your score, and are typically unwarranted checks on your account.
Hard inquiries are created when a lender or credit card company checks your credit to see if you’re eligible for their loan or card. Most hard inquiries occur when you actually apply for a loan or credit card. Usually, it will only drop your score by a few points, and after a few months, the score will rebound.
One hard inquiry could negatively affect your credit score by a few points, but the effect typically will begin to lessen after a couple of months. Multiple hard inquiries in a short period of time will have a more significant impact on your credit score, and can communicate to lenders that you are desperate for money or unable to qualify for credit. For this reason, it’s a good idea to avoid applying for several lines of credit at once.
Does this make sense? Do you have a better idea of what’s happening with your credit? If you have any questions, feel free to hit me up in the comment section, or add your own input!