To figure out how to improve your credit score, it is important to understand the factors involved. A previous blog post outlined the factors included in credit score calculations. To summarize, the factors and their relative impacts on your credit score are as follows:
Payment History: 35%
Credit Usage (Debt-to-Credit Ratio): 30%
Age of Credit Accounts: 15%
Credit Mix: 10%
New Credit Inquiries: 10%
We all make mistakes, including financial institutions, creditors, and credit reporting agencies. Having the potential errors identified and corrected can go a long way in improving your credit score. When reviewing your credit reports here are some errors to watch out for:
The three major credit reporting agencies are Equifax, TransUnion, and Experian. The Free Credit Report Act requires each of the three agencies to provide a free credit report each year when requested. For more information, visit the Federal Trade Commission’s Free Credit Reports page.
There are two types of inquiries that can be made into your credit report. Hard credit inquiries are made by financial institutions and require your authorization. When these hard credit inquiries are made in a short period of time, it will negatively impact your credit score. Applying for multiple lines of credit represent a higher credit risk. However, when the inquiries are made for interest rate comparisons for home, auto, and student loans, credit scores are usually not affected.
On the other hand, soft credit inquiries do not affect your credit score. Soft credit inquiry examples include self-checks and those that occur as part of a background check.
It is important to note that inquiries stay on your credit report for two years and are used in calculating your credit score for 12 months. If you have had several hard credit inquiries within the past year, refrain from applying for additional credit lines in the near future to improve your credit score.
When deciding which debt to pay down, choose credit cards first as they usually have the highest interest rates.
Making payments on your debt will positively impact your debt-to-credit ratio which accounts for 30% of your overall credit score.
Your debt-to-credit ratio (or credit utilization rate) is the proportion of your credit limit you are currently using. Lowering this ratio by making additional payments (and lowering your overall debt) can improve your overall credit score. Make it a goal to keep your debt-to-credit ratio below 30%.
Your payment history makes up over a third of your credit score. Therefore, when considering how to improve your credit score, finding ways to make timely payments on your debt should be at the top of your list. Here are some practical tips to make timely payments:
If you find yourself unable to make a payment by the due date, try your best to at least make it within 30 days. Many creditors and lenders do not report late payments to credit agencies until they are 60 days late.
This may seem counterintuitive when you are trying to figure out how to improve your credit score. However, even if you are not utilizing them, keeping older credit accounts open can have a positive effect on your credit score. Remember, the age of your credit accounts make up 15% of your credit score. When deciding which accounts to keep open, consider those with annual fees are likely not worth the cost of keeping open.
Keeping these credit accounts open with low or no balances can also decrease your debt-to-credit ratio. Having additional credit without the accompanying debt will improve your overall credit score.
Credit mix is the combination of credit types included in a person’s credit report and accounts for 10% of your credit score. Keeping a good mix of credit types is a great option to consider when deciding how to improve your credit score.
There are several types of credit including mortgages, student loans, credit cards, auto loans, and home equity loans. Although it is not recommended to open up lines of credit just to improve your credit mix, borrowers should be wary of having a mix that’s imbalanced. Those with credit reports showing the ability to pay off different types of credit are viewed by lenders as lower risk.
Consider your credit mix before applying for a new line of credit. If you decide to apply for one to improve your credit score, FICO recommends car, student, and personal loans as safer options when attempting to increase your mix.
Increasing your credit limits can help you lower your debt-to-credit ratio. However, it is important to avoid an increase in spending with these higher credit limits.
When determining whether to increase your credit limit, credit card issuers may submit a hard inquiry into your credit report. This can have a negative impact on your credit score in the near future. However, the long-term benefits of a lower debt-to-credit ratio may outweigh the short-term decrease. Before requesting an increased credit limit, contact the credit card issuers to determine if they will be submitting a hard or soft inquiry.
Becoming an authorized user on a responsible borrower’s credit card can be a relatively straightforward solution when you are considering ways to improve your credit score. Here are things to consider when pursuing this option:
At Easton Motors, we understand the importance of a good credit score. If you are in the market for a car, contact us to learn how we can help improve your credit score through our financing program.