This post will go in detail describing the best ways to improve your credit score. Whether you are at 750 or 550, there are better habits to have to improve your credit score for that mortgage, car loan, or even that premium credit card you want. There are things you need to avoid and there are things you can prioritize to boost your score.
A credit score considers the following factors:
- Payment History – 35%
- Credit Utilization – 30%
- Length of Credit History – 15%
- Credit Inquiries – 10%
- Types of Credit – 10%
Payment history affects your score the most out of the other categories. This one is simple. Pay your statement balances on time and ideally in full. Credit cards have extra security and perks compared to using cash or a debit card. Spend no more than you would normally and this way you can easily build your credit score without paying a penny in interest. Your payment history will grow as you pay your credit cards on time. If you miss even one payment, you will see a big drop in your credit score. Because of this, I would recommend turning on auto-pay in case you forget. This will be especially useful when you have a lot of credit cards.
Credit Utilization is the next biggest factor. This one is the one that tends to be the most confused. I was brought up thinking credit cards were horrible and that they are bad and somehow inevitably leads to debt. Then you have Youtubers and others claiming they have 10+ credit cards with great credit scores. As of writing this blog, I have 8 credit cards to my name and my score is pretty good for my age. I can verify that having multiple credit lines is not bad for you in the long term. In the short term, you will see a credit drop, but I will talk about that shortly.
The length of your credit history (aka how long you have had your credit lines to your name) attributes to 15% of your score. This is something that you cannot change directly but you will get better as it ages. There is no way to increase the length of your credit history, but if you just turned 18, now would be a good time to get your first credit card. Even if not, get your first credit card as soon as possible to start building your credit!
The two smallest factors in determining your credit score is the number of credit (hard) inquiries and the different types of credit you have. The number of credit inquiries is another popular thing people reference to claim that having too many credit cards are bad…except that they forget to mention that hard inquiries stop affecting your score after 12 months and will completely fall off your credit report after 24 months. In the short term, more credit inquiries will drop your score by a few points (depending on the overall strength of your credit history), but in the long term, these inquiries really do not. The one thing to note is that if you are trying to buy a house or a car within the next year, it is best to hold off on applying for a credit card to minimize the impact on your score but to also look less risky to the lenders. The second part is the different types of credit you have which includes credit cards, mortgages, car loans and even student loans. This is a small portion of the credit score and often ignored because if your other portions of the credit report are solid, this really does not affect your score too much.
Seeing the breakdown, you can see that having a lot of credit cards is not a bad thing per se. In the short term, you will get dinged when applying for a new credit card, but in the long term, credit cards actually help strengthen your credit report. Credit cards are not “bad” if you use them to your advantage as long as you follow the simple rule of: pay your credit card statements on time and in full. If you are interested in opening any new credit cards and want to support the blog, the links down below will be available. Note, those are referral links. But until next time…
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Checking out, Kenny