June 21, 2021 4 min read
Credit is that ever-moving target, that we are constantly trying to hit. it feels like we never actually know what works to improve our credit score. Credit is hard. Credit (for most) isn’t fun. And yet, it’s a major part of our society. So how can we actually hit the target?
I am going to take you through 5 credit tools and tips you can use TODAY to improve your credit score. Let’s jump in:
There is this thing called credit utilization and it makes up 30% of your overall credit score. It is one of the biggest parts of your credit score and one of the topics least talked about. CRAZY, I know…
Credit utilization is the ratio showing how much credit you use versus how much credit you have available. Let’s break down a real life example:
If you have a credit line for $10,000 with your bank, you should aim to spend less than 30% of the available credit line per month or $3,000.
We’ve all heard the term, “maxing out your credit card” and we know it hurts your score. Now you know why! Maxing out your credit card tells the algorithm that you are not spending responsibly, aka you are over utilizing your credit, and your score drops.
Use less than 30% of your available credit limit at any given time and your score will increase.
Making your payments on time accounts for 35% of your credit score. 35%! And yet this is one of the biggest problems people have with credit…Making their payments on time, every time.
The minimum payment on every single one of your credit card bills is a MUST. If you cannot pay off the credit balance in full each month, at the very least you need to make the minimum payment BEFORE the due date.
Pay your bills on time, don’t miss a payment. Missing just one credit card payment can significantly drop your score. Avoid the headache and frustration of trying to reverse a late payment. Put a reminder in your phone and then pay the bill when the reminder pops up. Problem solved!
10% of your score is based around The different types of credit you use and have. A.k.a., credit responsibly!
You should use more than one credit line or loan to build your score. The credit algorithm wants to see that you can be responsible withmore than one credit account, consistently.
Let’s talk examples:
This means you could have a mix of 3-4 credit accounts, a credit card and a car loan, a student loan, and a mortgage, the list goes on! Using these different types of credit accounts simultaneously shows your ability to handle credit responsibly. Or at least that’s how the algorithm is calculated, and we need to play by the rules so this helps us improve our score.
Pro tip! Did you know that each of your student loans counts towards one “credit account.” That is why it is so important to pay your student loans every single month. One late student loan payment can drop your score.
Pro tip: Did you know that most mortgage companies want to see at least 3 different credit accounts on your credit report before you buy a home? Yes, this is true! What does that mean for you? It means you have to show you can use and pay back a few different credit accounts on the regular.
Be strategic, set up auto pay for each credit account you use, and do not over leverage yourself. Get your system in place and use 2-3 different credit accounts every month.
Yes, applying for too many credit cards can hurt your score. New credit accounts make up 10% of your credit score. Applying for credit or “credit inquiries”, impact your score.
Myth buster! Pulling your own credit score does not drop your credit score.
Slow and steady wins the race when it comes to the number of credit accounts you have and apply for. Time and consistency are everything when it comes to the algorithm.
You have to take things a few months at a time, show consistency and then add additional accounts. Rome was not built in a day, your credit score can be a work of art of a hot mess. So don’t rush a good thing!
Taking out a new credit account should be limited to 2-4 times a year. Now, in certain circumstances, you may need to apply for credit more often and that is fine. However, try to avoid this if you are first starting out or have just started to develop your credit profile. Limit the amount of credit you apply for and space it out every 3 to 6 months so you do not drop your score.
15% of your credit score is determined by length of credit history. How long you’ve been using credit. If you close your oldest account, that history is deleted. Do not waste a good thing, keep your oldest credit account open and active even if you only use the card 1-2 times a year.
Your credit report is based on you showing a track record, your reputation with how you borrow money and pay it back. Credit takes time, and the length of your credit history is a big contributor to your overall score.
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