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Improve Your Credit Score
April 11, 2017
A credit score is a number used by lenders to help them decide "If I give this person a loan, will I get paid back on time?" Your score is a quick assessment, or snapshot, of your credit profile and thus not the entire picture. It is however, a very important metric used across all financial institutions to determine your risk - and thus, an incredibly important number to monitor, maintain, and grow. This number is ultimately used by any and all lenders to determine what you can and can't get - and how much it will cost.
There are three major credit bureaus that assess your credit data and create a score based on the information submitted to them by financial institutions. Your score may fluctuate across the 3 credit bureaus since certain lenders may not report to all three ( Equifax, Experian, and TransUnion) bureaus. That said, the data analyzed to create your score is relatively the same regardless of which bureau you're looking at. Let's take a look at what creates your score:
1. Payment history - The number of on-time, late, and historical delinquencies make up the largest portion of your score. To maintain the best possible score, always pay on time and never let an item go into delinquent status. Positive payments over time will continue to elevate your score but one missed payment can have a severe negative impact.
2. Amounts owed - The total amount of your outstanding debts and the percentage of available credit is the 2nd largest piece to your overall score. Have a large amount of debt isn't necessarily harmful if you are managing it well and on-time but to maximize your score, don't spend more than 30% of your open lines of credit such as HELOCs and credit cards. This demonstrates that you are able to manage it wisely without living on the edge and maxing out every available dollar loaned to you.
3. Age of credit - Another heavily weighted factor to your credit score is the age of your credit history. Creditors want to see consistent, on-time payment history and the longer the track record - the better. Having a perfect credit history for a six month period is not as reassuring as a perfect credit history for six years. Always make it a point to keep and never close your longest maintained item on record.
4. While the next two items do not hold high impact themselves, together they make up about 20-25% of your score. The first is your pursuit of new credit. Credit inquiries from a hard credit pull shows creditors that you are looking to obtain new credit. Obtaining a number of new credit items all at once introduces new risk since it generally means new payments are being thrown into your budget. An inquiry may drop your score immediately by 3 to 5 points but will impact your score less and less overtime. Keep in mind, soft pulls of credit do not affect your score.
5. Such as all things in life, being well rounded is a good thing. The types of credit in use makes up about a tenth of your overall score. It is favorable to have a wide spread balance of credit in use such as a mortgage, car loan, unsecured loan, and credit cards. Keep in mind you want to obtain a healthy amount of credit that is manageable in your budget so don't obtain new credit just to add variety.
Your score can range from 300 to 850, the higher the better. If you're looking for a credit boost, you may not be able to see overnight results but knowing what factors create your score, checking your credit report often, and keeping the above items in check will help it grow overtime.