Payment history (35%) — The most important component of your credit score is your payment history. Do you pay your bills on time? Do you have a history of late payments? If so, how late? Have you ever been turned over to collections? You can expect that late payments will deduct points from your score. [3] X Expert Source Derick VogelCredit Advisor & Owner, Credit Absolute Expert Interview. 26 March 2020. Amounts owed (30%) — What’s your overall debt load? If you’ve taken on too much debt, your score could suffer. Length of credit history (15%) — How long is your record when it comes to managing credit? If you’re brand new to the scene, then lenders will view you as a risky borrower compared to someone who’s been paying off debt for decades. New credit (10%) — Taking out a bunch of new loans and/or opened credit card accounts will reduce your score. Types of credit (10%) — A healthy mix of debt (a mortgage, a credit card, and a car loan) is viewed a little more favorably than debt consisting entirely of credit cards. However, don’t open a new credit account just to have “balance. " Instead, focus on the other components of your score.
Different lenders may use industry-specific scores. For instance, a credit card company may look at your FICO Bankcard Score, or an auto lender may order your FICO Auto Score, to give them a more specific look at your relevant credit information. [5] X Research source When applying for a personal loan, student loan, or mortgage, your lender may examine your credit score from all three bureaus. [6] X Research source
The contact information for TransUnion, Equifax and Experian can be obtained online at their websites or from the Credit Info Center. You can obtain one free credit report per year from each of the three agencies. Request one report every four months so you can continually monitor your reports. Your credit history is free but you may have to pay a small cost to get your actual credit score. Some banks and credit unions offer credit score information to their customers for free. [8] X Research source Free websites like Credit Karma don’t always provide accurate information. [9] X Expert Source Derick VogelCredit Advisor & Owner, Credit Absolute Expert Interview. 26 March 2020. Some free services are scams and will stand there between you and the credit companies in order to harvest your data and then sell the data to marketing firms.
Regularly paying your bills late. Outstanding or unpaid bills, or bills that have been sent to collections. Maintaining a debt to credit ratio higher than 30%. Multiple credit inquiries within a short period of time.
If you have a $10,000 credit limit and have a $4,000 balance, that means 40% of your credit line is used. This also counts for any single one of your cards or credit sources. If you have 3 cards with no balance but 1 card that’s 60% used, this could have a negative impact on your score. If you make large purchases one month, like an expensive vacation, your score will decrease. The score should increase again once you pay off the balance, so make sure you only charge what you can afford to pay off. Keeping your debt ratio below 10% of your credit limit is even better. Studies have found that people with high credit scores usually only use around 7% of their credit limit. [12] X Expert Source Derick VogelCredit Advisor & Owner, Credit Absolute Expert Interview. 26 March 2020.
It’s best to pay off late bills in full, but if you don’t have enough cash on hand to do that, pay what you can to start reducing your outstanding debt. If you’re paying off debts, try the avalanche technique. Pay off the debt with the highest interest rate first. Then work your way down from the highest interest rates to the lowest. You can also try the snowball technique. With this method, you pay off your smallest debt first and work your way up. This is not always the most efficient way to pay off your debts in terms of saving money, but the sense of accomplishment that comes with successfully paying off a debt, even a small one, can help motivate you to keep at it.
Even just one late payment could affect your credit score by 50-100 points. [15] X Expert Source Derick VogelCredit Advisor & Owner, Credit Absolute Expert Interview. 26 March 2020. If you have trouble remembering to pay bills, set reminders to go off on the day your bills are due. You could also set up automatic payments. This way, the money will automatically transfer from your account to the credit card without you having to do anything. Just make sure you keep enough money in your account.
Most credit cards have a relatively small minimum, like $25. However, if you have $1,000 of debt, it’ll take a long time to pay that down with minimum payments, and you’ll pay high interest while you do. If you can only afford to make minimum payments, it’s still better than nothing, and it avoids late fees.
Using cash is also a good way to stop yourself from spending too much. People usually spend more when they use credit cards instead of cash.
If your card has a $1,000 limit and you have $500 on it, then your debt ratio is 50%. However, if you get the limit increased to $2,000, then the ratio falls to 25%. Only do this if you know you can resist over-spending. Getting a limit increase but then maxing out the card won’t help you. You could also increase your total limit by getting a new card, but applying for new cards could decrease your score.
If, however, you have problems with temptation, it’s worthwhile to close unused cards, so you won’t be tempted to overspend. Fee increases may also be good reason to close a card, if you cannot convert the account to a lower or no-fee product. You may need to use old cards every so often to avoid fees or closures for inactivity. Any activity will do; there’s no need for a large or additional expense.
It’s usually best to avoid taking offers in stores for installment plans or store credit cards. These are additional, usually unnecessary lines of credit. Sometimes, opening a new card or credit line might be worthwhile. A card might have a great cashback offer or you might be able to save money by taking out an installment plan. Do your research to find good deals.
If you only have one credit card, try taking out a few different types of loans. For instance, you could take out a store installment plan on a piece of furniture instead of putting it on your card. Only do this if you can pay it back.
For other types of reporting errors such as fraudulent use of your identity, provide all the forms of proof that you have to the bureaus, such as cancelled checks, stamped invoices, police reports, etc. Put everything in writing and follow up at least once per week by phone with the bureaus until the inaccuracies are corrected on your report. [24] X Research source Late payments showing on your credit report can really hurt your score. Collections, judgments and tax liens are devastating. You can try to negotiate with the entity that reported the collections, etc. , for removal of such negative notations. Be persistent. If you have evidence and know that a charge is a mistake, the lender must remove it from your credit history by law, so don’t let them give you the runaround. A credit counselor or advisor can help you dispute items on your credit report. [25] X Expert Source Derick VogelCredit Advisor & Owner, Credit Absolute Expert Interview. 26 March 2020.
It always helps to remind lenders that you’ve always been a good customer who pays bills on time. They’re more willing to work with you if you have a good credit history. This is another good reason to keep your credit score in good shape. Lenders are less likely to work with you if you don’t have a good credit history.
A good financial adviser can also help you get your finances in order.
Some major warning signs of a scam are demanding payment upfront, promising results, and telling you not to contact credit reporting agencies. [28] X Trustworthy Source US Consumer Financial Protection Bureau U. S. government agency for protecting consumers in the financial sector Go to source If you’ve been scammed by a company like this, report them to the Federal Trade Commission.
