Credit scores are numerical representation of an individual’s creditworthiness, typically ranging from 300 to 850. It is determined based on a person’s credit history and serves as a key indicator for lenders to know the likelihood of an individual repaying their debts. Higher the credit score means more favorable credit profile, leading to better chances of securing loans and favorable interest rates.
Payment history is the most important factor influencing a credit score, accounting for about 35% of the total score. It reflects whether an individual has paid their past credit accounts on time. Late payments, defaults, and collections can severely impact this component, making it essential to consistently pay bills on time.
Credit utilization, or the credit utilization ratio, is the second most critical factor, making up around 30% of the credit score. It measures the amount of available credit being used. Ideally, keeping credit utilization below 30% of the total available credit is recommended. For example, if your limit is $10,000.00, you should try to keep your balance below $3,000.00.
The length of credit history contributes about 15% to the overall credit score. This factor considers the age of your oldest credit account, the age of your latest account, and also the average age of all your accounts. Generally, a longer credit history can contribute positively to your credit score as it provides a more extended track record for lenders to review.
Also known as credit mix, this factor accounts for about 10% of your credit score. It refers to the credit accounts you own, including credit cards, mortgages, auto loans, and retail accounts. Having different types of credit can be advantageous, as it shows lenders you can handle various types of credit responsibly.
Recent credit inquiries or new credit make up the remaining 10% of your credit score. This includes the number of new accounts you’ve opened and the number of hard inquiries made by lenders when you apply for credit. While applying for new credit can temporarily lower your score, the impact is typically minor unless you have multiple inquiries in a short period.
Maintaining good credit scores requires consistent effort and strategic financial habits. Here are some essential tips to help you maintain a strong credit profile over time:
Paying bills on time is the most important factor in maintaining a good credit score. Late payments can negatively impact your score, so set up reminders and/or automatic payments to ensure you never miss a due date.
High credit card balances can heavily impact your credit utilization, which is a crucial component of your credit score. Try to keep your balances below 30.0% of your total available credit. For example, if your credit limit is $10,000.00, try to keep your balance under $3,000.
Opening many new credit accounts in a short period of time can raise red flags for lenders and lower your credit score due to difficult inquiries. Be mindful of applying for new credit only when necessary and avoid excessive applications.
Regularly checking your credit reports helps you stay knowledgeable about your credit status and identify any errors or fraudulent activities. You have one free credit report every year from every major credit bureaus (Equifax, Experian, and TransUnion). Reviewing your reports can help you catch and dispute inaccuracies promptly.
Having various credit types like credit cards, auto loans, and/or mortgages, can positively impact your credit score. It shows your ability to own different types of credit and manage them responsibly. However, don’t open accounts you don’t need just to diversify your credit mix.
The length of your credit history plays a key factor in your credit score. Keeping old accounts open and active contributes positively to this factor. Even if you no longer use a particular credit card, keeping it open can help maintain a longer average credit history.
Using credit responsibly means not only paying on time but also avoiding maxing out your credit cards. High balances can harm your credit utilization ratio and your overall credit score. Try to utilize only a portion of your available credit to maintain a healthy utilization rate.
Repairing your credit involves a series of strategic actions aimed at improving your credit score. Here are some effective credit repair strategies:
The first step in repairing your credit is to obtain copies of your credit reports from 3 main credit bureaus (Equifax, Experian, and TransUnion). Review each report carefully for errors, such as incorrect personal information, account discrepancies, or fraudulent activities. If you find any errors and/or inaccuracies, dispute them to have them corrected.
A solid budget helps you manage your finances and ensures you can meet your debt obligations. List your income sources and expenses, prioritize essential payments, and allocate funds towards paying off high-interest debts first. A repayment plan can help you systematically reduce your debt, which positively affects your credit scores over time.
If you’re struggling to keep up with your payments, contact your creditors to describe your situation. They may be willing to offer better terms, like lower interest rates, extended payment periods, and/or reduced balances. Successfully negotiating with creditors can make your debt more manageable and help improve your credit standing.
If your credit situation is hard or overwhelming, consider seeking professional assistance. Two common types of professional help are credit counseling agencies and credit repair companies:
Knowing your rights can empower you to take action when you find errors on your credit report. Here’s an overview of key credit dispute laws:
The FCRA is a federal law that promotes accuracy, fairness, and privacy in consumer credit reporting. It grants consumers the right to their credit reports, dispute inaccurate information, and expect timely resolutions to disputes.
Under the FCRA, you have several rights, including:
Credit bureaus usually have around 30 days to investigate and respond to your dispute. They will contact the creditor for verification and notify you of the outcome.
Possible outcomes include the removal of incorrect information, correction of inaccuracies, or validation of the information as accurate. If the dispute is resolved in your favor, the credit bureau must give you a free copy of your corrected credit report.
Being aware of common credit repair scams can protect you from fraud and financial loss. Here are some pointers to recognize and avoid scams:
Under the Credit Repair Organizations Act aka CROA, credit repair companies cannot charge fees before providing services, and they must provide a written contract detailing your rights and the services they will perform. You have the right to cancel the contract within three days without incurring any fees.
If you encounter a credit repair scam, report it to the Federal Trade Commission aka FTC, Consumer Financial Protection Bureau aka CFPB, and your state Attorney General’s office. These agencies can investigate and fight against fraudulent companies.
Maintaining a good credit score over time involves a combination of diligent financial practices and informed decision-making. Here are the key takeaways:
By following these strategies, you can effectively manage and improve your credit score, leading to better financial opportunities.
