WH
Whitney Hansen
17 days ago

What Not to Do When You are Trying to Improve Your Credit Score

credit
credit score
By now, I hope you have read the first post of my credit series that teaches you why you should care about your credit score and outlines the top five factors that are used to calculate the number. 

Now it’s time for what NOT to do when you are trying to improve your credit score. Some of these no...
By now, I hope you have read the first post of my credit series that teaches you why you should care about your credit score and outlines the top five factors that are used to calculate the number. 

Now it’s time for what NOT to do when you are trying to improve your credit score. Some of these no-no’s might take you by surprise, so pay close attention.

Don’t miss or make any late payments on your loans


This one is obvious. You can’t be missing payments on your bills. If you’re having trouble keeping track of when things are due, you need a new system. Perhaps you could set up automatic withdrawals for your payments? Can you set up email reminders? Whatever it takes to ensure you pay all of your bills on time – do that. 

Don’t open any new credit cards


It might seem counterintuitive when I say don’t open any new cards if you are trying to build credit. But if you’re trying to improve your score, opening new cards is not a smart move. You DO want to have ample available credit to you (meaning you want high limits but low or zero balances) for a good credit score. But in the short-term, opening new credit accounts causes your score to decrease.

There’s a bit of a caveat with this one: if you don’t have any credit at all, you might have to start by opening a card to build credit. Opening a new card will ding your credit to begin with, but as long as you continue to leave it open with a zero balance, over time your score will rise.

Don’t apply for a loan


There are two types of credit report inquiries: hard pulls and soft pulls. When you are checking your own credit (which you can do for free once a year, it is a soft pull. Similarly, if a company checks your credit as part of a background check, this is a soft pull. Soft pulls do NOT ding your credit. 

However, every time you apply for a loan, the creditor pulls your credit report. This is a necessary pre-qualifier to get a loan, and these are “hard pulls” of your credit. All hard pulls result in a ding to your credit score. How much will this ding affect your score? Well, that’s a mystery. It might only bring your score down a few points, maybe 10, but is it worth it? This “ding” will stay on your report for about two years, so be smart.

Don’t make any major purchases on your credit card

This one goes hand-in-hand with the above. In particular, if you’re trying to buy a house (or want to buy one soon), do NOT go out and buy a new car or rack up $5,000 worth of furniture on your credit card. Spend only what you have and buy only what’s necessary. Hint: This is a great time to build a budget and stick to it.

Don’t declare bankruptcy


If you’re really in a bind with your debt, and you’re overwhelmed and not sure if you’ll ever be able to pay it off, you might be considering declaring bankruptcy to eliminate the debt and get a fresh start. But is a fresh start really what it is? 

Even if you’re desperate, bankruptcy is usually not a good option. If you do file for bankruptcy, it will lower your credit score and stay on your report for 7-10 years. Banks and creditors don’t like to see this, so if you declare bankruptcy, you’ll have a really hard time getting a loan for about a decade.

Don’t close old credit cards


A longer credit history improves your credit score, so even if you aren’t using your oldest credit cards, don’t close them. Keeping your older cards open (with zero balances) is a good move.

Don’t transfer several balances to one card


If you have a credit card with a really low interest rate and you want to consolidate all of your balances and move them to one card, it’s usually not the best option for your credit score. If you transfer all your balances to a single card, your credit utilization for that card increases, and this will hurt more than help your credit score. It’s usually more favorable to have a few small balances on various cards than max out a single card.




WH
Whitney Hansen
24 days ago

How to Improve Your Credit Score

money
credit
You probably know that there’s a mysterious number tied to your identity called your credit score. I say it’s mysterious because like most people, you probably aren’t sure exactly how it was determined, what it means, if it’s important, or what you can to do make it better (and why you want to)!

When it comes to managing your personal finances, ...
You probably know that there’s a mysterious number tied to your identity called your credit score. I say it’s mysterious because like most people, you probably aren’t sure exactly how it was determined, what it means, if it’s important, or what you can to do make it better (and why you want to)!

When it comes to managing your personal finances, it’s important to understand why your credit score matters and what you can do to improve it (or ensure it stays high if you already have a good one).

Your credit score (or FICO score) is a number that tells the bank how risky it will be to loan you money. The higher your score, the more likely you are to get a loan. Similarly, the higher your score, the lower the interest rate you’ll be eligible for.

FICO is the company that specializes in “predictive analytics” – they look at your credit history and try to predict how you will behave, financially. Here’s the thing – you can learn about what affects your score and what you can do to improve it, but there’s not an exact formula for figuring it out; you’re never going to be 100% sure how FICO came up with the number. The exact science is a bit of a mystery. Fortunately there are factors to consider and behaviors you can model that will help you improve your score.


Why you should care about your credit score

Your credit score matters most when you are buying a home or a car and need to get a loan. If your credit score is higher, you will get a lower interest rate, so over time the purchase will cost you less. The bank allows you to pay less interest each month because they believe you are financially responsible and you will be able to repay the loan without defaulting (missing a payment). When your credit score is low, the bank hikes up the interest rate, charging you more interest, because they fear you may have trouble making payments. They are trying to protect themselves, but it’s kind of backwards, isn’t it? 

Basically, you get rewarded for being more “responsible” (if you have a higher score), by paying less interest. It’s worth paying attention to the things that factor into creating your score and trying to get it as high as you can.

Payment history


Your payment history refers to your past behavior paying your bills. Payment history makes up about 35% of your credit score (the largest amount!). If you always pay student loans and credit cards on time, FICO will reward you with a higher score in this area. FICO looks negatively at late and missed payments and if you have these on your record, FICO lowers your score. Here’s where the mystery lies – you never know exactly how much one late or missed payment will affect your score. The best way to improve your credit in this area is by making consistent, timely payments.


Credit utilization


FICO is looking for you to have ample credit available to you, but the catch is that you shouldn’t be using nearly all of what’s available at any given time. Credit utilization is measured both individually by card and also across multiple cards, and it makes up 30% of your FICO score. There’s no hard rule here for how much credit you should have and use. In the past it was recommended not to carry a balance higher than 30% of the available limit on any one card for an optimal credit score. That’s still a great practice, but it’s not guaranteed to help you get your score as high as possible. There are several factors in credit utilization that play into your score:
  1. How many credit cards do you have?
  2. Are any of your cards maxed out? If not, are you using half of what’s available to you? Less than 30% of what’s available? Less than 10% of what’s available?
  3. How much do you owe on each of your cards? 
  4. What’s the total amount that you owe on all of your credit cards?
Since there’s not an exact formula to get your score as high as possible, the best practice for credit utilization is to carry low balances on the cards you have (and to still have credit available to you, should you need it).

Length of credit history


The length of your credit history plays into your FICO score at about 15%, and longer credit history is better than only having a short history. This is an important component and one that many people mistakenly overlook when they are trying to clean up their credit. For example, if you have an old credit card that you opened ten or twenty years ago but haven’t used, you should continue to keep this credit card open (with a zero balance) rather than closing it out completely. By keeping a card you have had for many years you increase your length of credit history, which positively affects your FICO score.

New credit and inquiries

New credit and how often a third party is pulling your credit accounts for 10% of your FICO score, but opening lots of new cards does not lead to an improved score (in fact, it will likely result in the opposite because it sends the message that you need additional money that you don’t have). The best practice for new credit is to open new cards only when you need them and pay them off right away. Don’t forget, when you check your own credit report, that does NOT hurt your credit score, it’s only when other parties are checking your report.

Credit mix


The final component of your credit score is based on the assumption that you have a good credit mix. If you have a good credit mix then you have a variety of types of loans and you are able to repay them all. There are 2 types of loans: revolving and installment loans. Revolving loans (for example, credit cards) aren’t based on a predetermined amount for a loan, these loans allow you to make charges, pay them off, then make charges again. Installment loans are loans that you get in a lump sum and make payments on each month (such as a student loan). If you have both types of loans and pay them off in a timely manner with no late payments, that’s great! It’s not recommended to go out and get loans to increase your credit mix since it’s only 10% of your FICO score.

Credit scores are confusing and since there’s no perfect formula to getting the highest possible score, it’s important to take these 5 factors into account as you build your credit as an adult. Not sure what your score is? I recommend using annualcreditreport.com once a year to pull your report for free. There are a lot of sites out there to choose from – this one is reliable. 


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