When you need or want credit—whether you’re applying for a credit card, mortgage or home equity line of credit (HELOC)—lenders consider many factors. Chief among them is your credit score. Because people with higher credit scores get approved more easily and at better interest rates, it’s worth adopting some lifelong habits for building and maintaining the highest credit score possible.
What’s the Difference Between Your Credit Report and Credit Score?
Before diving into credit scores, let’s discuss credit reports because they’re closely related. Businesses that extend credit to you regularly provide information about your borrowing relationship to one or more of the three major credit bureaus (Equifax, Experian and Transunion), who then compile your credit report. It generally includes:
- Current and past lenders
- Total amounts and outstanding balances of your installment loans (e.g., mortgages, home equity loans and student loans)
- Credit limits and outstanding balances on your revolving loans (e.g., credit cards and HELOCs)
- Missed or late payments
- Bad debts, foreclosures or bankruptcies
It’s wise to routinely monitor your credit reports and dispute any errors. Normally, you can pull one free credit report per year from each of the three bureaus at annualcreditreport.com. For the time being because of the COVID-19 pandemic, you can pull one per bureau per week.
How Are Credit Scores Calculated?
The various pieces of information from your credit report are weighted and then added up to form your credit score, which is basically a prediction of how likely you are to pay your bills. For instance, the commonly used FICO credit score weights data from your credit report as follows:
- 35%: Payment history
- 30%: Available credit used
- 15%: Credit history longevity
- 10%: Credit mix
- 10%: New credit requests
What’s Considered a Good Credit Score?
According to all three credit bureaus, credit scores range from 300 to 850. Generally, scores over 800 are excellent. Those around 700 and above are good and become very good over 750. Once it dips below 660, it’s fair, and anything under 580 is considered poor.
What Can You Do to Improve Your Credit Score?
Your credit score continuously fluctuates because your credit needs routinely change. For example, one month you might need to make several big purchases on your credit card, but the next month you may charge nothing. That being said, there are still ways to build and maintain a higher credit score.
1. Pay bills on time.
Payment history counts more than anything else in calculating your credit score. Missing just one payment or having a few late payments can impact your score, so pay all your bills on time every month, even if it’s just the minimum. Many creditors let you sign up for automatic payment reminders. Take advantage of this feature so you don’t forget about upcoming due dates.
And if your payment is going to be late? It’s worth calling to let the creditor know it’s on the way because that may induce them to hold off reporting it to the credit bureaus.
2. Resist maxing out credit.
The less credit you’re using out of your total available credit (your utilization rate), the better it is for your credit score. Let’s say you have an outstanding balance of $2,500 on a credit card with a maximum limit of $10,000, then your utilization rate for that card is 25%. However, if you’re carrying a high credit card balance like $7,500 on that same card, your utilization rate goes up to 75%. Experts recommend keeping your utilization rate under 30%.
3. Sustain credit relationships.
There are obviously good reasons to refinance your mortgage with a new lender or switch credit card companies, but just keep in mind that the age of your oldest credit account and the average age of all your credit accounts play a factor in your credit score. Even if you find a card with a better rate or rewards program, keeping an older card and just using it sporadically so you benefit from its age might be smarter than closing the account.
4. Don’t apply all at once.
Whenever you apply for credit, the lender accesses your credit report, which is called a hard inquiry. If you have too many hard inquiries in a short period of time, it affects your credit score because it can suggest a higher risk of non-repayment. The best way to avoid this is by limiting your credit applications to those you truly need and by spacing out your requests over a longer period of time.
On the other hand, soft inquiries don’t impact your credit score. These occur when lenders—with or without your knowledge—do a preliminary review of your credit report to pre-qualify you for a credit card or some other type of credit.
5. Maintain a healthy credit mix.
Finally, creditors like borrowers who can successfully manage different types of loans. This isn’t suggesting that you apply for credit you don’t need. It just shows how if you’re ready to take on a mortgage, car loan or other credit type that’s new to you, this can potentially boost your credit score, assuming you make on-time payments and keep your utilization rate in check.
Editor’s note: Quorum is not affiliated with any of the companies mentioned in this article and derives no benefit from these businesses for placement in this article.
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