Your credit score can be an impactful number, as it directly influences the lending rate a bank may offer to you.
To many, their credit score remains a bit of a mystery and it can be frustrating if its just not quite high enough to secure the loan that would be preferred. This article will shed some light on this what factors comprise your credit score and offer ways to improve it.
Your credit score is calculated from the reports provided by each of the three credit bureaus: Equifax, Experian, and TransUnion. There are many different ways to calculate your score and all of the methods use complex algorithms. Some have been recently developed, such as the FICO 9 and the VantageScore. These two are similar and reduce the impact of medical debts. They also report additional items such as rental payments to a landlord.
These may come into more prominent use in the future, but for now the most common method used by lenders is the FICO 8.
For the FICO 8:
- a poor score is considered to be 300 to 569,
- a fair score is 570 to 669,
- a good score is 670 to 739,
- and a score between 740 to 850 will result in the optimal rate offerings.
There are five main factors affecting the FICO 8 score. Payment history comprises 35% of the score and tracks whether your payments are made on time, and for how long they have been made. Credit utilization is 30% of the score. This is the ratio of your total balance in revolving debt (such as credit cards) to the total amount of revolving debt that you have available. Generally, this ratio should be about 30% or lower. The length of your credit history comprises 15% of the FICO score. This measures how long your credit lines have been open and how recently they have been used. The longer they have been open (with a good utilization ratio), the better. Your debt mix is 10% of the score. This measures how many different types of debt you have, such as a mortgage, credit lines, and car loans. Diversifying your debt helps this number. New credit comprises the final 10% of the FICO score. This partly measures your ability to repay. Opening up too many lines or new loans can negatively influence this number.
If your score is not where you currently want it to be, there are several steps you can take to address this:
- To improve your payment history, pay all your obligations on time. This includes cell phone bills and non-debt payments. A great way to do this is with automatic bill pay from a designated checking account. If the funds are placed there immediately on payday, it reduces the likelihood of overspending and coming up short. For the non-debt payments, the credit bureaus have programs that can track this to add it to your report, but there is usually a fee involved.
- You should pay off your existing balances before acquiring additional debt. If you are paying off a credit card, keep it open (as long as the fees are not too high) after the balance is paid. This will help improve your credit utilization ratio. Keeping the balances low on any revolving debt lines when compared to other types of loans will also help the ratio. Do this by paying off your credit card each month.
- Only take on additional debt when it is needed. It does not help to open up many different credit lines and loans to improve your credit mix. Doing this will create too many hard inquires on your credit reports. This indicates to lenders that you may be tempted to overspend. A hard inquiry is made when a lender processes an application for debt. If you check your score yourself, or if it done by a lender as part of pre-approval process, this is known as a soft inquiry and your score should not be affected.
- Dispute any inaccuracies on your three credit reports. You will have to contact the individual credit bureau with the inaccuracy. Each bureau has a dispute process that may take some effort to resolve but should be rectified after following their procedures.
It may take some time to rebuild your credit score following these tips, but over time it will certainly improve. DelinquPublishencies will remain on your reports for seven years after correction. Settlements of debt for less than the original loan amount can harm your score for up to seven years as well. Public records remain for seven years, but a Chapter 7 bankruptcy will last for 10 years. Hard inquires remain for two years.
These items demonstrate that once your have improved your score, it is important that you maintain it. It can be a long uphill fight, even if you begin to do everything right today. It is very much a balancing act that is dependent on your ability manage your cash flow. Sticking to your budget and living within your means, while paying attention to the influencing FICO score factors, should allow you to get the optimal rates you deserve. Your financial advisor can review these items and your debt with you. This will allow you to make the most informed decision possible.