So you want to improve your credit score? We all do and while it is not the easiest thing, it is not hard to do. First, you need to find out what your score is. Thankfully, you can go get your reports free once every 12 months from each of the three agencies.
Now that you know where you stand let us talk about a credit score. Two items account for about a third of your credit score.
1 - Your payment history, if you have a history of making payments on time your score will go up, but if you are delinquent, you are going to get your score reduced.
2 - Owed versus Available Credit – compares how much credit you have available and how much you have used. Your goal should be to stay below 50 percent utilization, or lower if possible. Lenders view high utilization as a high risk and therefore it is reflected with a lower FICO score.
The final third of your credit score is determined by three other factors.
1 - Credit History Length – Opening and closing accounts is not good for your score. You want to stick with accounts for at least 10 years. Your FICO factors in your oldest active account as well as the average of all of them.
2 - New Credit – When obtaining new credit do not open multiple accounts in a short period because multiple inquiries wave a red flag as a risky behavior. The exception to this rule is soft inquiries, which are also known as pre-approvals and pre-screens. These soft hits have little to no impact. Another exception is when rate shopping from various lenders. Multiple inquiries within a 30-day period count as one for a home or car loan, which usually do not hurt your score.
3 - Credit Types – Yes what you use matters. A home loan or student loan with good payment history will help your score whereas only having credit cards from the local department stores can have a negative effect. Diversity always helps but that does not mean you should go out and open credit whenever the offer is presented to you.
Your credit score does not take into account your age, how much money you have, where you are from, or if your dad is Donald Trump.
Here is an example to increase your credit score. Thirteen percent of people have scores over 800. Generally, their profile would look something like this:
- four to six credit cards
- zero late payments in the last 7 years
- one or more installment (car or home) loans with excellent payment history
- a history with an average age of 10 years and a few accounts with more than 20 years
- fewer than three credit inquires in the past 6 months
- absolutely no bankruptcies, foreclosures, charge-offs, or collections
- debt levels below 35 percent of each account’s credit limit
Now for a quick recap
- Your history matters
- Make your payments on time
- Have a good mix of credit
- Do not max out your cards
…and that should help get you a good score!