If you’ve ever applied for a loan, a mortgage, a credit card, or financing to have solar panels installed on your home, you’ve probably heard about the magical number that is your credit score. This three-digit ranking can either open doors or slam them shut, depending on where it falls on the scale.
But what exactly makes your credit score tick? What actions can send it soaring, and which ones can make it nosedive? Let’s delve into the world of credit and uncover the key moves that have the biggest impact on your credit score.
“What is a credit score?”
Before we jump into the dos and don’ts, let’s quickly recap what a credit score is. Your credit score is a numerical representation of your creditworthiness. Lenders use it to gauge how likely you are to repay borrowed money. The most commonly used credit score is the FICO score, which ranges from 300 to 850. The higher your score, the better your chances of getting approved for loans with favorable terms.
“How is my credit score calculated?”
Your credit score is influenced by several factors, with each playing a different role in its calculation. The major components include:
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit Inquiries (10%)
Now, let’s explore the actions that can either give your credit score a boost or drag it down.
“What can I do to raise my credit score?”
- Pay bills on time. It sounds simple because it is! Paying your bills on time, every time, is the single most important thing you can do to improve your credit score. Since payment history accounts for 35% of your score, consistently paying bills when they’re due can have a huge positive impact. Pro tip: Set up automatic payments or calendar reminders to ensure you never miss a due date. Even one late payment can cause your score to drop significantly, so staying on top of your payments is a must.
- Reduce credit card balances. Credit utilization, or the percentage of your credit limit that you’re using, is the second-largest factor affecting your credit score. Ideally, you want to keep your credit utilization below 30%. For example, if your credit card limit is $10,000, try to keep your balance under $3,000. Pro tip: If possible, pay down your balances multiple times a month, not just when your bill is due. This can help keep your utilization low and your credit score high.
- Keep old accounts open. The length of your credit history also plays a role in your credit score. Closing old credit accounts can shorten your credit history, which may negatively affect your score. Instead of closing old accounts, keep them open and occasionally use them for small purchases to keep them active. Pro tip: If you’re concerned about the temptation to make unnecessary purchases, shred the card but leave the account open. This way, you maintain the account’s age without risking overspending.
- Diversify your credit mix. Having a variety of credit types – credit cards, a mortgage, an auto loan, etc. – can positively impact your credit score. This shows lenders that you can manage different types of credit responsibly. Pro tip: While it’s not advisable to take on unnecessary debt just to improve your credit mix, if you’re in the market for a new loan, it could be beneficial to consider a different type of credit product than you’ve used previously.
- Regularly review your credit report. Mistakes happen, and sometimes they happen on your credit report. Regularly reviewing your credit report can help you spot any errors or fraudulent activities that could be dragging down your score. You’re entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) every year. Pro tip: If you find an error, dispute it with the credit bureaus immediately. Ideally, you should enlist the services of a certified credit counselor on our platform to ensure you get the results you want. Correcting mistakes on your credit report can give your score an instant boost.
Even a single missed payment can lower your credit score, and the damage can last for years.
“What actions can lower my credit score?”
- Missing payments. Just as paying on time can boost your score, missing payments can have a significant negative impact. Even a single missed payment can lower your credit score, and the damage can last for years. Pro tip: If you’re unable to make a payment, contact your lender right away. They might offer hardship options that can help you avoid a negative report to the credit bureaus.
- Maxing out credit cards. Spending to the top end of your credit card limits can be a red flag to lenders, suggesting that you’re overextended and may struggle to repay debts. If your credit utilization ratio climbs above 30%, your credit score could take a hit. Pro tip: If you’re close to maxing out your credit cards, prioritize paying them down as quickly as possible. If you can’t, consider asking your credit card issuer for a higher limit, which can help lower your utilization ratio.
- Applying for too much credit at once. Every time you apply for credit, a hard inquiry appears on your credit report. While a single inquiry might only cause a small dip, multiple inquiries in a short period can add up and significantly lower your score. Pro tip: Be strategic about when and why you apply for new credit. If you’re shopping for a loan, try to do it within a short period (usually 14-45 days), as multiple inquiries for the same type of loan within this window are typically treated as a single inquiry for comparative shopping purposes.
- Closing credit card accounts. While it might seem like a good idea to close a credit card account you no longer use, this action can negatively impact your score by reducing your available credit and shortening your credit history. Pro tip: Instead of closing the account, consider keeping it open and using it for small, recurring expenses that you can easily pay off each month. This can help keep your credit history intact and your utilization low.
- Defaulting on loans or declaring bankruptcy. Walking away from loans before they’re paid off or declaring bankruptcy are among the most damaging actions to your credit score. These events can stay on your credit report for up to 7-10 years, making it difficult to qualify for credit or get favorable terms. Pro tip: If you’re struggling with debt, seek help before things get to this point. The certified, compliant nonprofit credit counseling services that are a part of the CredEvolv platform can assist and help you explore options to avoid default or bankruptcy.
Final thoughts: How to take control of your credit score
Improving your credit score isn’t an overnight process. But with the right actions and the right people in your corner, you can make steady progress over time. Remember, your credit score reflects your financial habits, so the more responsible you are with credit, the better your score will be.
Stay vigilant, make informed decisions, and connect with a nonprofit credit counselor today. Then watch your credit score climb as you become loan-ready in no time!