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Improving Credit Scores

Tuesday, August 10, 2021

credit score improvements

Understanding how credit scores work can seem complicated and intimidating. If you are just starting out on your credit building journey or want to learn more about how credit scores are determined, this article will give you the credit score insights that you need. 

Monitoring Credit Reports

Keeping a tab on your credit score is the first step when it comes to building your credit score. The three main credit bureaus include Equifax, Experian, and Transunion. You are allowed one free credit report from each bureau each year. Regular monitoring of your credit report allows you to keep an eye on how your credit score is trending.

Credit Score Make Up

Your credit score is made up of five different sections.

  • Payment History 35%
  • Credit Usage 30%
  • Age of Credit Accounts 15%
  • Credit Mix 10%
  • New Credit Inquiries 10%

Payment History

Payment history has the largest impact on your score, which means the easiest way to build your credit score is being on-time with your payments. Some easy ways to ensure that you are on time with your payments are by setting up automated payments, setting due date reminders on all your devices, and by creating a file record to keep track of your bills.

Credit Usage

Credit usage has the second largest impact on your credit score. The rule of thumb is to keep your total outstanding balance at 30% or less. For example, if a borrower has two different credit cards with different revolving credit limits:

  • Credit line $1,000, balance $300
  • Credit line $3,000, balance $1,000

The revolving credit across the two cards is $4,000 ($1,000 + $3,000). The total credit used is $1,300 ($300 + $1,000). This means the credit utilization ratio is $1,300 divided by $4,000. This ends up being a utilization rate of 32.5%

Age of Credit Account

Age of credit accounts is important when it comes to maintaining and improving your credit score. The older your average credit account is with regular payment, the better. Therefore, you want to keep accounts with longevity and not close these accounts. When you close an older account it can shorten your average credit age, which accounts for 15% of your score. 

Credit Mix

Having a good credit mix accounts for a good portion of your credit score. The two different types of credit are revolving and installment credit. Installment credits have fixed end dates and have payments due every month. Examples of installment loans include student loans, personal loans, auto loans, and mortgages. Revolving credit includes credit cards, personal lines of credit and home equity lines of credit (HELOC). Revolving credit does not have a specified end date or set balance like installment credit.

By making timely payments on a healthy mixture of credit accounts, it shows that you can successfully manage multiple loan types, which can have a positive impact on your credit score.

New Credit Inquiries

New credit inquiries consist of soft and hard inquiries. Soft inquires do not affect your credit score, while hard inquiries may impact your credit score. Here are some examples of soft and hard inquiries:

Soft:

  • Giving a potential employer permission to check your credit report.
  • You apply for a preapproval for a loan or mortgage.

Hard:

  • New credit card applications.
  • Mortgage applications.
  • Auto loan applications. 

Making an occasional hard inquiry will most likely not affect your credit score. If you make many hard inquiries in a short period of time, it can have a negative effect on your score. For additional questions about credit reports, your local CNext lender will be glad to assist you.

(Sources: Debt.org, Investopedia, USA.gov)

 

Tags: Credit Scores


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