This post is sponsored by Lexington Law.
What are the most important factors when trying to improve your credit score? Most people who have little to no experience with credit, credit cards, and credit scores feel like it is a murky, black hole of secrets.
The truth is that, though often misunderstood, improving your credit score is pretty straightforward. If you do nothing else but make payments on time, every time, you will be well on your way to a respectable credit score.
When you are young, it can be difficult to know what is a smart financial move and what will get you in trouble.
For me, I have always been apprehensive of anyone who appears to be selling to me. I know you have been there before. You are standing at the Macy’s checkout, about to drop $200 on an outfit and shoes, when the cashier says, “If you open a Macy’s card you can save 15% on your purchase today.”
I won’t hate on Macy’s, as this is what happens at many major retailers in the US. Where they trip you up is by getting you to think that the $30 you will save on that purchase will be worth the hit to your credit score when you open a new credit line with them.
When cashiers make the sales pitch for the credit card, I have to fight to let them finish their sentence, before I politely decline. The only time I may entertain the idea is when my purchase is expensive, like $1,000 or more at least, but that’s another post for another time.
My point in saying all of this is that you might not know the main ways your credit score is determined or how to improve your credit score! Let’s take a dive in and simplify this puzzling topic.
Making Timely Payments
By and large, most of the general public is aware that the most important factor in your credit score is if you make your credit payments on time. This is a given. What might come as a surprise to some though, is the extent to which it factors into your score.
Before I knew much about credit, I always thought making payments on time made up the majority of the score. In reality, FICO credit scoring, which are the most common scoring mechanism used, factor your payment history as only 35% of the score.
Of course, 35% makes it important, but then you must wonder what else is factored in!
Low Credit Utilization
Credit utilization isn’t the clearest term; it is the ratio of how much credit you have used compared to your credit limit, or how much you can borrow.
Credit utilization factors into 30% of your FICO score. Many people may not realize just how much maxing out their credit cards can affect their credit score. Keeping your credit balance low can help you ensure that your credit score stays healthy. FICO reports that the people with the best credit reports have a utilization below 6%.
Rather than limiting the number of cards you have, focus on keeping your credit usage low. An instance where you may need to limit the number of cards you have is if you have many accounts that you have recently opened. FICO prefers long standing accounts, factored into the average age of all accounts. With that said, maintain long standing accounts if you have them!
Knowing that your payment history and credit utilization make up a total of 65% of your credit score, if you need to keep things simple, focus on making those two areas healthiest to improve your credit score.
Average Account Age
FICO considers the length of your credit accounts when determining your score – this makes up 15% of the score. A longer standing credit account will give them the ability to better predict future credit worthiness.
This is where new accounts factor in. If you have long standing accounts and then you open a number of new credit accounts, that will pull your average account age down significantly and hurt your credit score.
One thing to keep in mind if you are new to borrowing is that FICO requires credit history to be at least six months old to generate a credit score. If you have never opened an account before, getting a credit card or making a purchase on credit is the best step to generate a credit score.
New Credit Lines
At 10% of your FICO credit score, new credit factors in to help lenders determine if you are in desperate need of credit to help you along financially.
If you are opening a large number of credit accounts, FICO may consider that you are in a tough spot financially and you are leaning on new credit accounts to come through. This can be perceived as less creditworthy and lower your score.
Different Types of Credit
FICO considers what type of accounts you have, such as credit cards, retail accounts, mortgages, and the like. This factor drives 10% of your credit score.
FICO is not looking for you to have one of each type of credit, but if there is limited credit history to look to, they may consider what types of accounts you have and the mix of those as a whole. You may be more experienced with credit if you have different types of accounts.
As with anything, don’t take on credit that you don’t plan to use. Keep in mind too that your overall financial health comes before your credit score. An 800 credit score may not necessarily mean that you have better financial health than someone who has a 700 score.
Always focus on making the best financial decisions for your family first. If you are looking to make a large purchase on credit that will use your credit score to factor things like terms and interest rates, you may want to review the above areas to improve your credit score.
Don’t know what your credit score is? Lexington Law can provide your summary credit report card. If you find that you have major credit problems that can’t be fixed with a few on-time payments, Lexington Law can help you! Contact them to find out more.
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