Are you planning on applying for a mortgage? Are you going to take out an auto loan in the near future? Are you applying for a line of credit with your bank? Every time you apply for new credit, the lender goes straight to your credit score. It’s a number that represents your overall history with credit, summarizing how you’ve managed all your different accounts in the past.
Before you apply for that big loan, you should check your credit report to see if there are any red flags in your history, and so you know what the lenders are seeing. Credit bureaus like Equifax and TransUnion use several elements of your financial profile to generate their score.
Below, you’ll find out how to improve your credit score by looking at what goes into calculating it.
A substantial part of your credit score is your payment history, making up 35% of the calculation. Your timeliness in paying your bills matters. The single most effective way to improve your credit is to stay on top of payments.
Avoiding late payments, defaults, and third-party collections will give you a solid foundation on which to work. When you make full payments on each account on time, not only do you stay out of debt, but your score will also improve.
Credit Utilization Rate
Your credit utilization rate accounts for 30% of your score and measures how much you’re carrying in loans compared to what is available to you. Let’s say you have two cards, each with a $3,000 balance, as well as a line of credit for $10,000. One of your cards is maxed out, and you owe an additional $1,000 on your line of credit, but the second card is fully paid off. You owe a total of $4,000 out of $16,000, and your CUR rate is 25%.
Anywhere under 30% is a good target, but under 10% is even better. Your CUR is also why you generally should not close accounts when you pay them off yourself.
You also get points for how long you’ve had an account open. Recently acquired accounts may drag your score down, while an account you’ve had for years can improve the situation. It’s not the biggest factor, but holding onto older accounts can help.
The number of times you’ve applied for more credit, and how long ago you made that application, are also factored in. It’s why you shouldn’t apply for new accounts too often. Hard inquiries, made by lenders, will stay on your credit report for 3 years according to Equifax, and if there are fewer than 5 inquiries, they don’t come off the report.
Keep in mind that if you’re rate shopping for a certain type of loan, like a mortgage or student loan, the inquiries you make within a certain timeframe may be considered a single hard inquiry. But don’t apply for multiple cards at once.
These are some of the factors that go into your score. Generally, if you want to improve your credit score, follow these simple rules:
- Make your monthly payments on time every single month;
- Keep your old accounts open;
- Don’t apply for too much credit in a short period of time.
If you can start on that track, you’ll have better credit in no time.