In a society where many people think that cash is king, having good credit is just as, if not more, important. Having good credit is equally as important as having good money management skills. No bullshit, your credit score is one of the most important numbers in your life. If you’re someone that wants to know how you can improve your credit score, easily and quickly, keep reading.
What is a Credit Score
A credit score is simply a number assigned to credit holders that indicates their creditworthiness. In other words, it lets the banks and lenders know how likely you are to pay back your debt. This little 3-digit number can make all the difference!
Several things are considered credit and can affect your score. They’re normally broken out into two basic types: secured and unsecured. A simple definition of secured credit are things that have to be backed by collateral or another asset. A mortgage is considered a type of secured credit. Unsecured credit requires no collateral to be able to receive it. Credit cards and student loans are considered unsecured credit.
Why Having a Good Credit Score is Important
Credit scores can range anywhere from 300 to 800. Simply put, the higher your credit score, the better. The ideal credit score is anything 700 or above. Although it’s relatively simple to build your credit up from scratch, it’s much harder to improve a bad credit score. (I said harder, but not impossible!)
As I stated earlier, your credit score can make all the difference in your financial life. If you have good credit, you’ll have access to more opportunities and can live more comfortably. But, having a bad credit score can be a huge roadblock to living the life that you want. Getting a car, buying a house, renting an apartment, or even qualifying for a job (yes, you read that right!) can be made that much harder when your credit score is poor.
The 5 Factors that Affect your Credit Score
Five key factors help to determine your credit score. It’s important to know what they are and how much each factor can impact your standing. That way, when you put in the work to increase your score and improve your credit, you’ll know what areas to focus on.
Payment History (35% of Credit Score)
Your payment history is one of the main factors that affect your credit score. Your payment history is one of the first things that creditors, no matter who or what type of credit you’re seeking, will look at. Why? Because this is the first level of indication that will inform them whether you’re a reliable borrower that will actually pay back your debts.
Credit Utilization (30% of Credit Score)
This is the second most important factor that affects your credit. Your credit utilization is the ratio between the total balance you owe your creditors, and your total credit limit.
(Sidebar: You guys know how I’m so focused on eliminating my credit card debt? Read about my debt pay-off journey here. Well, this is why. Each time my credit utilization goes down, my credit goes up! )
The moral of the story is, you want to keep credit utilization low. The recommended threshold is to use less than 30% over your available credit. Anything more will begin to hurt your score.
Length of Credit History (15% of Credit Score)
The age of your credit accounts can also affect your score. This accounts for about 15% of your credit score. The length of your credit history is important because it can prove that you’re experienced with maintaining your credit balances. In other words, the older the better. Many elements can affect this including how long your accounts have been open, and how long it’s been since the account has been used.
Account Mix (10% of Credit Score)
Although this isn’t as important as the other items mentioned. It’s good to have a good mix between revolving and installment debt. Revolving loans, like credit cards, allow you to make purchases, pay them off, then make charges again. With installment loans, you receive a lump sum and then are expected to make payments towards it each month (like a student loan or private loan).
Credit Inquiries (10% of Credit Score)
Believe it or not, the number of times your credit is pulled can affect your score. There are two types of credit inquiries: soft inquiries and hard inquiries. A soft inquiry usually happens when your credit is pulled without you knowing about it doesn’t show up on your credit report. On the other hand, a hard inquiry or pull does show up on your credit report because it is usually used to determine whether or not you’ll be given more credit. Because of this, too many hard inquiries can lower your credit score.
How to Improve Your Credit
Typically, it takes about 3-6 months to see a change in your credit when you have consistent good behavior. First things first, it’s important to know where you’re starting. Take a moment to check your credit report in detail. You are entitled to one free credit report a year, so take advantage of it! Make sure that everything is accurate. See something that is wrong? Dispute it! Having the credit reporting agency correct any wrong or outdated information is one of the fastest ways that you can give your credit an instant boost. Are you ready to improve your credit score? Check out my vital tips below!
(You can check your credit with any of these three agencies listed below)
Pay Your Bills on Time
Yes – this is rule number one! Want to improve your credit score? Make sure that you’re not leveraging too much credit so that you can afford your payments. Also, make sending out consistent and timely payments each and every month a priority.
Pay Your Debt Down
Remember that you want to keep your credit utilization down <30 percent. If your utilization is higher than that, be sure to pay those balances down as fast as you can. But in addition to paying your debt down, it will be good practice to limit your credit card usage that way you can pay these balances off faster. Check out my post on ways that you can eliminate your debt here.
Don’t Close Your Credit Accounts
Many people make the mistake of closing their older or unused credit accounts with hopes of improving their credit. However, you should do the opposite. You should keep these accounts open so that it increases the length of your credit history.
Limit Hard Inquiries
Even though hard inquiries only affect 10% of your overall credit score, you should still aware of what’s happening with your credit report. Be mindful of what types of new credit you’re applying for and when you’re doing so. As good practice, try to space out your credit inquiries, if possible.