Finlit #3.5 Credit Improvement

In FinLit #3, I promised to provide examples of how to increase your credit score, so here it is.

To prove your credit score, you’ll need to understand this five things and their impact level on your score.

1) Payment history for loans and credit cards, including the number and severity of late payments, has a HIGH IMPACT on your credit.

Payment history is the frequency of your owed payments. You want your payment history to be 100% but no one is perfect, and you may have missed a few payments or just one. To increase your score aim, for 98% or better payment history. The only way to do that would be to make constant payment before the due day for an extended period. Time and consistency is your ally.

2) Credit card utilization rate has HIGH IMPACT

Credit card utilization is how much of your total line of credit you are spending. It’s the ratio of total amount of credit used over the total sum of credit given. The stages of utilization are as followed: 0%-10%, 11%-29%, 30%-49%, 50%-74%, 75%+ . Ideally, you want to be in the first bracket 0–10%, but under 30% is the most you should have before it starts to affect your score negatively.

For example:
You have three credit cards with for a total line of credit value of $5,000 and you spent $2,500 on your credit cards, your utilization is 50 percent. The only way to reduce your utilization is to stop spending and pay off more of the balance that remains.

In that scenario to be in the first bracket, you’ll need to reduce your credit card debt to $500. You’ll need to pay off $2,000. Low utilization improves your score, and high utilization decreases your score.

3) Public records such as bankruptcy, civil judgments, or lien have a HIGH IMPACT.

They are also called derogatory mark which can stay on your account for 7–10 year. If you have a derogatory mark on your account, my best advice is to avoid getting another one by paying your debts before you make any non-essential purchases. Time is the only thing that can heal this wound.

4) Type, number, and age of credit accounts has a Medium impact

The golden standard is to have 7+ years of open credit lines. If you are a college grad or recent college grad, there is nothing you can do about that if your parent/s did not open a line of credit in your name when you were younger. However, if you do not have any lines of credit open, you should start today by following one of our other blogs. Also, lenders typically like to see that you’ve used a variety of accounts responsibly.

Avoid getting your account closed or closing them yourself. You should only get credit cards you want to use because if you go several periods without making a purchase on that credit card, the company can revoke your privilege and close the account. Variety and duration matters.

5) The number of inquiries for your credit report has a low impact.

Hard inquiries are a result of a lender requesting a look at your credit report. Hard inquiries from things like credit card applications, real estate agents, and phone companies can stay on your report for up to 2 years, but their effects tend to fade over time. So avoid trying to apply for multiple credit cards in a given year.

Note: your Fico score, one type of credit score, consider all inquiries within a 45-day period for a mortgage, an auto loan, or a student loan as a single credit inquiry. The same guidelines apply to a search for a rental property such as an apartment. You can avoid lowering your score by doing your apartment hunting within a short period.

Having 4 or less hard inquiries within a year affects your credit less than multiple late payments or a constant high credit card utilization but even reducing the need for those inquiries will stabilize or increase your score.

Applying for a new credit card or loan can temporarily lower your score by 5 points or less if you are approved. But caution, it can also decrease your score if you’re rejected. So view your card and loan options carefully.

Summary

Regardless of your credit score, understanding how these five factors play a role in shaping your score will help you increase or maintain it.

If your score is poor, below 600, I’ll emphasize focusing on the first three. Making payments consistently to reduce your debt and avoid derogatory marks will significantly help your score with time.

If you score is above 600 but below 700, the same advice applies to you as well, but also there could be a chance you do not have enough lines of credit open. You may only have one credit card. So if your payment is above 97% and your utilization is below 20%, maybe getting a new line of credit is in-stored.

If your score is above 700 adding another line or two of credit is need to bump your score, we are not just talking credit cards. Continue to make payments and keep that credit utilization low.

It is important to mention that your score will not increase 100 points in a week, but the lower your score, the easier it is to get large jumps. It is also vital to mention that constantly opening new credit cards will not improve your credit. For those with 700+ credit score, opening new credit cards may hurt your score in the short term. Above all consistency of payments and monitoring your spending are traits that people with good credit score possess.

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