Improving Your Credit Score

When it comes to your credit score, no one definitively knows how much it will go up or down. It’s designed that way. The algorithms are proprietary, so none of the credit bureaus can or will tell you.

Don’t fret. We at least know the five factors that affect your score, and how much weight they carry. The five factors, and their respective percentages, that determine your credit score are:

1)     Payment History (35%)

2)     Amount Owed (30%)

3)     Credit Mix (15%)

4)     Credit History Length (10%)

5)     New Credit (10%)

Payment History 35%

Payment History accounts for 35% of your total score. This means falling behind on any of your loans will greatly impact your credit score. The good news is that most lenders have a grace period1 and won't report late payments until they're 30 days overdue. Even if you can only afford minimum payments, this isn't a category to fool around with. Make your payments on time, and above the minimum amount when you’re able.

 Making regular, on-time payments will impact your credit most, but it will take time. Your on-time payments should outnumber your late payments, and your late payments shouldn't be recent.

 In some rare cases, you can ask your lender to remove the late payment from your history. So long as you have a long history of on-time payments since then.

Amount Owed / Credit Utilization 30%

Using more of your available credit limit will have a large impact on your credit report. And not for the better.

 This isn't limited to one line of credit2, it applies to your total revolving credit. If the limit on 3 credit cards adds to $3k, you should not use more than $900 (30%) of your available limit.

 Using too much of your available credit is a sign to creditors that you might be risky. This tells lenders that you might be using credit cards to make up for low/lost income. This makes it harder for you to receive any kind of loan. When you use too much of your available credit, your credit report will say exactly that. This means your credit utilization is too high.

 To improve this category, focus on paying your revolving debts and keeping the balances below 30%. As important as it is to pay your bills on time, it’s also important not to max out your credit. 

Types of Credit / Credit Mix 15%

There are two types of credit: installment and revolving.

 Installment loans are what you would consider your traditional loans. Things like your car loan, a personal loan, or even a mortgage. Your revolving credit would be any type of credit card or personal lines of credit. It is a loan with a prescribed limit, that you can pay off and use again as often as you're able.

 Credit lenders will compare the loan you're asking for to loans you may have taken in the past. They do this to estimate potential risk. If you have unfavorable credit, but a good history with car loans, you may be able to apply for another car loan. You may not receive the full loan amount if you have never taken that type of loan before.

 Credit bureaus monitor the types of loans you have open. Consumers who have a combination of revolving and installment loans are likely to have a higher credit score. As opposed to individuals with only a single type of credit.

History Length 10%

How long have you been borrowing money or using credit? The longer you use credit and use it well, the more it will impact your score. For better or for worse will depend on your payment history. While this isn't a major contributor to your credit score, it provides qualitative value.

 When lenders review your credit, they want to see that you have a long and good history of responsible use.  It’s easier to get an estimate of someone's behavior when provided with a long history. The downside is that establishing a history can take a lot of time. No pun intended. But that is also the reason why history length is a smaller percentage of your credit score.

 One strategy to improve this category is by keeping your oldest credit card open. That does not mean you have to use it regularly, but keep the account open. Once that line of credit is closed, it reduces your history length, thus lowering your score.

New Lines/Loans 10%

When applying for a loan, lenders do not like recent loans or new credit cards. Regardless of the purpose. Someone whose job it is to mitigate risk will assume you are using debt to supplement income. Which means that you are spending more than you are earning.

 Lenders will also look at recent inquiries that are shown on your credit report. The more inquiries on your credit report, the riskier you will appear to the lender.

 Credit monitoring companies, like Credit Karma, will conduct what’s called a soft inquiry, or soft pull. A soft pull is a credit history inquiry that will show most of your credit history. You can do as many soft pulls as you'd like, and it won't affect your credit report or loan opportunities.

 Banks or other lenders, when applying for a loan or credit card, will conduct what’s called a hard pull. A hard pull is a formal inquiry into your credit history. Every hard credit pull will lower your score, even if only for a few months. But the company and date that conducted the inquiry will remain on your credit report for two to three years.

 One of the best ways you can improve this category is to do nothing. Use only loans that you need and be tactical with your lines of credit.

Beware of the Credit Repair Companies

Avoid debt repair companies. Most of the work done by debt repair companies to improve your score can be done yourself. This involves tasks like paying down credit cards or becoming an authorized user on someone else's good credit card.

 One tactic to improve your credit in a shorter time is to work with your landlord or a service provider, like utility or phone companies. These companies can send your payment history to one or more of the credit bureaus, which can help boost your score.