Whether you’re looking to get your first credit card for everyday expenses or take out a mortgage to purchase your first home, credit isanessentialtool for helping people tomeet their financial goals.
When applying for a line of credit, thehigher your credit score, the more likely you will be toqualify,and the more options you will have available to you.
Here, we’ll break down the 5 factors that influence your score—inorder of most heavily weighted to least—and the simple yet effective steps you cantaketo give your score a boost.
Payment History (35%)
Payment historyis the biggest single factor used to calculate your credit score. Late payments (even a couple of days), past due accounts,andaccounts in collectionsall have a negative impact on your credit. Regular, on-time payment of the minimum amount (or greater) will improve your credit score. Anon-timepayment history in the range of 18 months or longer will begin to show results in a growing credit score.
Quick Tips for Credit Cardand LoanPayments:
- Setup automatic payments.If your late payments aredue to forgetfulness, this is the easiest way to ensure you never miss a future payment.
- Change your billing due date.Suppose you have multiple bills due on the same day of the month. In that case, it may be worth changing your payment due date to align better with your personal situation (e.g., spacing out bills to make them more manageable, or ensuring your payment date is afteran income deposit date.)
- Explorehardship/ deferment options.If you’re having trouble making ends meet,call your creditors andrequest a forbearance or payment deferral.They may also be able towaive late fees or even allow alowerpaymentfora period of time.
Amount Owed (30%)
Your creditutilizationisdeterminedby the amount you owe—notrelative toyour incomebut,compared tothe total credit limit available to you, expressed as a percentage. (For example, if yourcardbalanceis$600 andyouhave a spending limitof $2,500, your credit utilization is $600/$2,500 or 24%.) As a ruleofthumb, your credit utilizationshould be no more than 30.
Quick Tips for Improving Amount Owed:
- Pay down your balance early.If youcanmake small payments throughout the month, this canhelp keepyour balance downand lower yourcreditutilization.
- Decrease spending. Findareas where you can cut back on spending to lower your utilization.
- Ask for a credit line increase. Increasing your credit limit is the simplest way to decrease your credit utilization without having to cut back on spending.
Length of Credit History(15%)
Although not the most heavily weighted category, the length of a borrower’s credit history is important. It’s an indication tothefinancialinstitutions what kind of borrower youmaybe in the future.In addition to the overall time an individual has had credit accounts open, credit history is also determinedbyhowlongspecifictypes of accounts have been open,andhow long it’s been since those accounts have been used.
Quick Tips for Improving Credit History:
- Get a secured credit card.Backed by a cash deposit,a secured credit cardcan bean excellentlow-riskway for those who have not had a credit card previously to start building credit.
- Keep credit cards open.Closinga credit card can negatively affect your score.
If you have cards you aren’t using, placing a small recurring charge on them (such as a phone bill or streaming subscription) can help to keep the card active whilekeeping your overall credit utilization low.
Credit Mix (10%)
Credit mix is determined bylooking atthe types of credit you are carrying (this includes credit cards, retail accounts, installment loans, mortgage loans, etc.)as well as your payment history in each area.
Quick Tips for ImprovingMix:
- Explore loan options that work best for you.Your credit mix isn’tthe most impactful category, and you shouldn’t pursue loans unless they make sense for you and your personal needs.Infact,you mayalready have afair credit mix—things likecredit cards,personal loans, auto loans,and mortgage loans are all considered different types of credit.
- Make sure you pay loans on time.A good credit mix is moot if you aren’t making timely payments–ensure you are making at least the minimum payments on your outstanding loans each month.
New Credit (10%)
Research shows that opening several credit accounts in a short amount of time represents amore significantrisk—especially for people who don’t have an established credit history.
- Open new credit accounts only as needed.Every time youapply fora new credit card,this creates a hard inquiry on your credit,which will automatically lower your score. Having more credit than needed can also encourage unnecessary spending and lead to increased debt.
- Understand how hard inquiries show up on your report for different types of loans. Whilemultiple inquiries over a short time frame for credit cards may result in significantscore damage, other types of inquiries—such ashomeor auto loans—are reported a little differently. Since lenders know people often shop around, these types of inquiries won’t hit your report for 30 days, and when they do, they’ll be counted as a singular inquiry.
So,there you have it.If you implement these tips, you should start to seeagradual increase in your credit score.Remember:Your credit score is based on patterns over time, with an emphasis on more recent information. Improving creditwon’t happen overnight,but with persistence and consistency,your score should gradually improve over time!
Free Credit Report Review
Need some extra help navigating your credit report? GreenPath’sNFCC-certified credit counselors can walk you through a free review of your credit report. They’ll explain how to read the report and help you to make a planfor managing your credit score to support your goals.
Content courtesy of our partnersGreenPath Financial Wellness.
